Don’t prepay your property taxes until you read this!
As a financial advisor and CFP® Practioner I’ve had numerous discussions in the past few weeks about prepaying 2018 property taxes in 2017. Time is running out, this strategy is picking up steam and homeowners are practically sprinting to their city hall office. Not so fast. Below are three reasons to consider before pre-paying your 2018 property taxes.
1) AMT! There is an Alternative Minimum Tax, also known as AMT. To explain in a nutshell, when your tax liability is calculated, an additional alternative method to calculate your tax is computed and compared to your original tax liability. You end up paying the higher of the two taxes. AMT was put in place to ensure everyone pays a minimum tax. Your AMT calculation is similar to your regular calculation but several deductions are excluded. One of those deductions is property tax! This means that if you are going to pay AMT, additional property tax payments will not help. Unfortunately, it can be difficult to figure out if you will be subject to the AMT and it is best to reach out to your financial or tax advisor.
2) You may not hit the SALT (state and local taxes) cap next year. Starting in 2018, there will be a ceiling of $10,000 on the total of local taxes, state taxes and property taxes eligible for deduction. Many people in New York City and New Jersey will easily blow past this $10,000 cap. However, there will be some who pay property taxes but their SALT is under $10,000. This is more likely in no or low tax states like Texas, Florida and Nevada. Make sure you anticipate to be over the cap of $10K for your 2018 tax year before committing your 2018 property tax payment to 2017.
3) You need the liquidity or the money! It is not a secret that much of America lives paycheck to paycheck or is in debt. If you are living on a tight budget and paying property taxes would eat well into your emergency fund, you should pass on this one. Even worse, don’t go into credit card debt to pay your property taxes early. It is likely the dollars you pay in credit card interest will far outweigh any tax savings you can achieve.
