Twin Falls accountants weigh in on prepaying property tax
Accountants like Jared Heward got information about the GOP tax bill the same way as everybody else – just a story here and there.
“Until it becomes a law it doesn’t do us any good to study it,” he said.
Now it is a law, Heward and the other accountants at his firm – Holmstead, Howe and Heward – have been studying it.
Heward said the new tax bill is far from simple. He holds up his pointer finger and thumb as he describes the 400 pages of “light reading” he’ll have to do to help his clients in the future.
Among the myriad of differences, one that people are acting on is a strategy to pay property tax before the U.S. tax law changes with the new year.
“It’s a case-by-case basis,” Heward said.
The case for is two-pronged. The first one has to do with the standard deduction increase next year. For a married couple the standard deduction now is around $12,000. If you can write off more than that when you itemize on taxes you can take the bigger deduction.
Under the new plan, the standard deduction doubles. So now if an average married couple can write off more than $12,000 by itemizing, but less than $24,000, it makes financial sense to take the standard deduction.
“Your itemized deductions would have to be essentially twice as big to start getting benefit there, so that limits the amount of deductibility initially,” Heward said.
So a person who thinks they will itemize this year, but not next, could write off all of their property tax on their 2017 return if they pay it this year.
That is what many people in Twin Falls County are doing.
Twin Falls County Treasurer Becky Peterson said property tax is paid to them in two installments. The first half is on due on Dec. 20. The second half is due in June of the next year.
"We have however had numerous individuals pay both tax installments this month referencing the new tax bill as the reason why,” Peterson said in an email. “We have also had a few property owners who, based on conversations with their accountants, paid their 2017 taxes and made prepayments on their 2018 taxes.”
The early payments are simply a strategy – a way to get more money on this year’s return if you think you’d get the same either way on next year’s.
“They’re being encouraged to maybe prepay some of that tax,” Heward said. “Pay that second half that would be due in June now, and you get that deduction right now, because it probably won’t be deductible in the future.”
While that strategy could be driving some of the early payments, it may not be the only reason. Heward said under the new tax law, state and local write-offs will be limited to $10,000. This year there is no cap.
Property tax falls under the state and local umbrella. So for people who still wish to itemize and write off more than the new standard deduction, only $10,000 of those itemized deductions can come from state and local taxes, which could be another reason to pay those property taxes in full before the New Year.
“If you’re a high-income earner, and you’re paying significant taxes, whether it’s on your home or to the state of Idaho,” Heward said, “that may really shrink down the amount of itemized deduction you have available. That’s not the case in 2017.”
All of that has led to a local and national trend of not procrastinating.
“In certain situations from our perspective that’s sound,” said Dennis Brown, an accountant with Dennis Brown CPA.
Brown reiterated Hewards point of the prepaying strategy being a good idea on a case-by-case basis. But he said it’s not cut and dry. There may be things written in preventing people from manipulating the system this way.
Because the law is still so new “we’re all somewhat guessing,” Brown said.
One thing Brown points out is the strategy is simpler for people who have their property fully paid off.
Many mortgages have aspects set up for paying property tax, so Brown said many people may be paying property taxes on a month-by-month basis rather than the two waves. In that case he’s not sure how prepaying could be communicated between county accounts and mortgage ones.
One thing he does point out is that the prepaying is strictly a strategy. Brown said he’s heard people talk about how the deduction cap on state and local taxes is mostly a tax cut.
“That’s a false assumption,” Brown said.
Overall the Twin Falls accountant points out the standard deduction is better than before.
“The vast majority of my clients that itemized before are probably not going to itemize in 2018,” Brown said.
Ultimately – stop us if you’ve heard this – it’s a case-by-case basis. Both Brown and Heward encourage people to talk with a tax professional before they make any big decisions, because this would affect everyone differently.
“The easiest thing to do would be to contact your tax professional,” Heward said.