My clients are asking if they should pay their real estate taxes this year or would it benefit them to wait until next year to pay two years of real estate taxes in one calendar year. It is a great question and the answer has really changed this year based on the new tax law, Tax Cuts and Jobs Act (TCJA).
New Limit of $10,000 Per Year for the Deduction of State and Local TaxesThe question is should I double dip by paying for two years of my real estate taxes in one year? Unless your real estate taxes are relatively low the answer will like be no, now that we have the new TCJA. This new tax law limits the deduction for state and local taxes to $10,000 annually starting with the 2018 calendar year.
The Deduction for State and Local TaxesFor the deduction on schedule A of state and local taxes, the taxpayer chooses between state sales tax and state income taxes. In addition to those taxes, taxpayers can deduct other state and local taxes like property taxes. But again, the new limit for this deduction is now $10,000 per year.
So unless your real estate taxes were less than $5,000 a year it is probably not worth paying for two years worth of taxes in one year. There are additional factors that you will also need to take into consideration, like the changes to the standard deduction amounts.
Impact of a Higher Standard DeductionBeginning in 2018 there will be no deductions for exemptions and the standard deduction amount will be significantly higher. For 2018 the standard deduction for a single person and those filing married filing separate will be $12,000. For Head of Household the deduction will be $18,000 and for those filing Married Filing Jointly and for Surviving Spouse the deduction will be $24,000. The additional standard deduction for the aged or blind will be $1,300 and $1,600 for unmarried taxpayers.
The higher standard deduction will mean that fewer taxpayers will itemize their deductions on schedule A so real estate taxes will not be relevant for many taxpayers now.
What This Means For YouOf course, you want to know if there is a way around this, especially if you live in a state with higher taxes. Because there is not the same kind of limit on charitable contributions (for now) some have tried to find a way to make their real estate or other state taxes be classified as charitable contributions. However, the IRS has addressed this issue stating:
an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.
However, there is an exception:
The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred.
So basically there is no realistic way around the new limit on this deduction on your personal return.
This Limitation Does Not Apply for Business DeductionsThere is no such limitation for businesses deducting real estate taxes. However, keep in mind that business deductions must be ordinary and necessary for the business to operate. So there are some discussions that you should be having with your CPA about the new tax law.
StrategyAs mentioned above there is no limit for charitable contributions, so you might want to consider the bunching strategy for charitable contributions instead of for state and local taxes. How would this work? Let's say you are close to the standard deduction in a typical year for you but you make significant charitable contributions. In this case, from a tax standpoint, you might consider bunching your charitable contributions into every other year if they take your deductions over the standard deduction. For example if you are single and typically make more than $6,000 a year in charitable contributions but you are not over the standard deduction, then you could double up your charitable contributions in one year and not make any contributions the next and then alternate between taking the standard deduction one year and taking itemized deductions the next year. This example would work for married taxpayers but the deduction amount would need to doubled.
This is a strategy that charitable organizations may not like but it may be better than you making smaller donations because of the lack of a tax benefit.
Year End Help
I have regular year end conversations about this topic with many of my clients starting toward the end of their third quarter. Yes I prefer to talk to my clients throughout the year, and not just at tax time. While I charge more for tax planning, it enables me also to provide more value for you rather than merely preparing tax returns. This would enable you to get real value that affects your bottom line. So if you want a CPA that gives you more than tax returns then email me using my contact information below to setup an appointment to discuss your situation.
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The State Income Tax Deduction on Your Federal Return - The Balance
The IRS Throws Salt into the SALT - Deduction - Limit Wound - Forbes
Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.