WASHINGTON –- Senate Minority Leader Charles E. Schumer on Monday asked the Internal Revenue Service to give a break to all New York taxpayers who paid their 2018 property taxes early in order to ease the pain of the coming limits to the state and local tax deduction.
A tax code overhaul passed by Republicans in Congress will limit that deduction to the first $10,000 of state and local taxes paid in 2018, prompting thousands in high-tax states such as New York to prepay their 2018 taxes in late 2017.
But many of them won't be able to do that, for two reasons. The new tax law bars people from prepaying state and local income taxes. And while the law allows people to prepay their property taxes, the IRS ruled recently that they can do so only if their property was assessed in 2017. If 2018 property taxes were to be estimated based on an assessment from prior years, taxpayers could not pay their taxes early, the IRS ruled.
Schumer, a New York Democrat, said that's just wrong.
“The just-passed tax bill hammers middle-class New Yorkers and any relief that can be provided – by the IRS or any other entity – must be provided,” Schumer said.
He said there's nothing in the law to justify the IRS decision to limit prepaid property tax deductions to properties that were assessed in 2017.
“The IRS ought to do the right thing here; it is common sense and fair – especially given how this bill unfairly targets states like New York and hard-working middle-class taxpayers,” he said.
Schumer made his request to the IRS in order to clear up confusion the agency's interpretation of tax law regarding the prepayment of property taxes.
In a late December statement, the IRS said: "In general, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018. A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017."
Many tax preparers interpret that as meaning that people could deduct prepaid taxes on their 2017 return so long as they knew what their 2018 tax bill would be – but not if they based a prepayment on estimated taxes.
By that standard, Buffalo and Niagara Falls homeowners who prepaid their 2018 taxes would be allowed to claim the deduction, since they could get their exact 2018 tax bill.
But 25 towns in the Buffalo area and the cities of Lackawanna and Tonawanda only offered taxpayers estimated 2018 bills, meaning taxpayers in those municipalities could be out of luck in claiming a bigger "SALT" deduction when they file their returns for the 2017 tax year.
The $10,000 limit on the SALT deduction takes effect in the 2018 tax year. And in a letter to acting IRS Commissioner David J. Kautter, Schumer said the agency should give property owners a break no matter how their municipalities calculated their 2018 tax bills.
"New York taxpayers are confused about this hastily written tax law and need clarity, consistent with the law, on provisions that may cause them to see a tax hike," Schumer wrote. "The IRS should rescind their recent guidance, which is not supported by the law, and clarify that taxpayers are allowed to deduct their prepaid 2018 property taxes to state and local governments for tax year 2017."