December 22, 2017

As you may know, today the President signed into law the most sweeping tax legislation in a generation. Among the changes, starting in 2018, the new legislation limits the amount of state and local taxes that individuals may deduct each year on their tax returns.

As this new limitation is of particular interest at year end, we would like to provide greater clarification on the matter.

Which state and local taxes are affected? For 2018, individual taxpayers’ deductions may be limited for both state and local income taxes and state and local property taxes. In addition, the deduction for foreign property taxes will be eliminated. (NOTE: the new limitations do not apply to property taxes paid on a rental property or deductible by a trade or business.)

What is the new limit? Beginning in 2018, only up to $10,000 in combined state and local income taxes and property taxes will be deductible as an itemized deduction. Foreign property taxes will no longer be deductible.

Does this affect me? If you usually claim the standard deduction, then this change will likely have little or no impact on your tax liability. If, however, you do itemize and usually claim more than $10,000 in state and local income and property taxes, then you are more likely to be affected by the new limits. If you file a non-resident tax return, then the change may only affect your deduction for state and local income taxes, not property taxes.

Should I pre-pay my 2018 property taxes by December 31, 2017? A common tax planning technique for 2017 is to pay state income taxes and property taxes on or before December 31, 2017, in order to obtain a deduction in 2017, as opposed to delaying the payment/deduction to 2018, where it may be limited. Indeed, some U.S. counties are encouraging taxpayers to prepay their 2018 property taxes in 2017. However, in order for 2018 property taxes to be deductible in 2017, the 2018 property taxes must have been assessed and the prepayment of the 2018 property taxes must be paid by December 31, 2017. In addition, if you have an alternative minimum tax liability for 2017, the prepayment of 2018 property taxes may not provide you with any tax benefit (since property taxes are not deductible for purposes of the Alternative Minimum Tax).

Should I pre-pay my 2018 state and local income taxes by December 31, 2017? The new law does not allow an individual to claim an itemized deduction in 2017 on a pre-payment of state and local income tax for 2018 or future years. If you still have an outstanding state income tax liability for 2017 (because you suspect you will have a balance due with your 2017 state return), then we suggest you consider pre-paying the 2017 tax liability by December 31, 2017. As with property taxes, if you are liable for the Alternative Minimum Tax in 2017, you may not receive a benefit for the 2017 payments of some or most of your state income taxes.