With three days left in the calendar year, there is still plenty of confusion about whether thousands of taxpayers who rushed to prepay property taxes this month will be able to claim an extra deduction on their next tax returns.
Many jurisdictions across the country had been telling residents they could make — and possibly deduct — these prepayments, as a way to try to lessen the impact of a new federal cap on state and local tax deductions that will commence with taxes filed in 2019.
But late Wednesday, the Internal Revenue Service said taxpayers may only claim deductions for 2018 on taxes assessed during the 2017 calendar year.
"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," the IRS said in its Wednesday advisory. "A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017."
That prompted some local government officials to warn property owners who just forked over thousands of dollars months ahead of schedule that those payments probably aren’t deductible.
Other local bureaucrats were scrambling to define at what stage of the process a property is considered assessed. Is it when the bill goes out? When the value of the property is established by the city or county government?
In the District, city leaders were confident that property assessments were issued in time for residents who prepaid to claim deductions.
In many Virginia municipalities, as well as in California, leaders warned that assessments have not been completed and prepayments probably would not qualify for deductions.
“The billing is the mechanical part of it — it is the assessment or the levy that is crucial,” said Jackie Perlman, principal tax research analyst at the Tax Institute at H&R Block. “The assessment means that the county has sat down, they have their [property tax] rate, they have evaluated your property, and they have concluded you owe X amount on your property.”
Another looming issue is whether jurisdictions that have not assessed will be able to offer refunds to people who paid taxes in advance in hopes of claiming a deduction.
Nicole Kaeding, an economist with the Tax Foundation, a think tank, said it is not unusual for the IRS to issue advisories offering its interpretation of laws passed by Congress. But, she said, it is likely that some of these uncertainties stemming from the new tax bill and the subsequent IRS advisory will have to be figured out in court.
“I don’t think taxpayers are going to have complete clarity by year’s end, and I do suspect there will be some litigation from someone who has prepaid but their payment is not allowed,” Kaeding said. “At worst, if an individual has prepaid and doesn’t get the deduction, they’ve provided an interest-free loan to their municipal government.”
Here’s a preliminary look at what the jurisdictions in the D.C. region and across the country are telling their residents.
The nation’s capital seems more optimistic than most of its neighbors that its residents will be able to prepay their taxes and take advantage of the deductions one last time.
Jeffrey DeWitt, the city’s chief financial officer, said in an email to city leaders Thursday that properties in the District have already been assessed for 2018.
"Pursuant to the IRS Advisory, since the District both assessed properties and set real property tax liabilities in 2017, there is a basis, if a taxpayer chooses to prepay real property taxes by December 31, 2017, for the taxpayer to claim a deduction on his or her 2017 return," DeWitt said. A statement posted on the website of the D.C. Office of Tax and Revenue drew the same conclusion.
D.C. homeowners can prepay their taxes and find out more at taxpayerservicecenter.com.
Assessments are effective Jan. 1, but properties are not actually assessed until later in January or February. Tax rates are set in the spring, and tax bills are mailed in May or June. In other words, deductions seem extremely unlikely, based on the IRS advisory.
Kevin Appel, an attorney for the Treasurers' Association of Virginia, said that past legal rulings in the commonwealth seem to suggest that jurisdictions are not required to refund voluntary prepayments of property taxes.
“I’ve been looking at cases, and there may be some cases that say you’re not required to do it,” Appel said. “For some jurisdictions, [refunds] will be a burden.”
Fairfax County: Virginia's largest jurisdiction, which took in more than $15 million in prepayments this week, said it is reviewing reimbursement options.
It has extended office hours through Friday.
Loudoun County: County Treasurer H. Roger Zurn Jr. described the situation as a "mess" and said some residents have already demanded refunds.
Late Thursday, the county said it could provide a preliminary 2018 assessment to residents seeking to make prepayments before the end of the year. But the county warned that it cannot guarantee that these prepayments can be deducted.
Residents seeking their estimated 2018 assessment were told to call the Commissioner of the Revenue at 703-777-0260.
Alexandria: More than 650 Alexandria taxpayers made prepayments of more than $6 million from Dec. 1 through Dec. 27, according to a city news release.
“The City continues to encourage taxpayers who are considering prepayment to consult qualified tax professionals before deciding whether to prepay and determining the date by which payment must be sent or received,” the release states.
Customers who made prepayments may request refunds by contacting the city's Treasury Division at firstname.lastname@example.org or 703-746-3902.
Arlington: Arlington County Treasurer Carla de la Pava said her office has taken in $11.5 million in prepayments from 1,569 residents since Dec. 1, with more than half of that coming in Wednesday. Taxpayers were still arriving Thursday morning to prepay taxes, despite the IRS directive.
“We have had a few people requesting refunds, but not as many as you might think,” de la Pava said. Taxpayers who want their money back have to submit a request in writing, and it may take as long as eight weeks for the refund.
The vacation-depleted staff was working through the 1,000 phone calls and messages, and 500 emails, that came in Wednesday.
Both Montgomery County and Prince George’s County — large Washington suburbs that have a combined population of nearly 2 million — say they have not yet assessed properties for 2018.
Which is ironic, because both jurisdictions took unusual steps this week to try to allow residents the option of prepaying their taxes.
Montgomery County: The County Council interrupted its holiday recess to meet in emergency session Tuesday and passed a law allowing prepayment.
On Wednesday, 700 residents prepaid their taxes in person at county offices, with payments totaling about $8 million. An unknown number of additional residents mailed their payments.
The county said in a statement Thursday that the new prepayment law does not permit immediate refunds.
"In accordance with law passed by the Montgomery County Council on December 26, 2017, there can be no refunds until there is a 2018 tax bill for your account, the prepayment of 2018 tax is posted to your 2018 tax bill, and the prepayment exceeds the amount due on the 2018 Real Property Consolidated Tax bill," the statement said.
Prince George's County: Prince George's County announced Wednesday that its council, too, would interrupt recess to consider emergency prepayment legislation on Thursday.
But after the IRS issued its guidance, Prince George’s canceled the emergency meeting.
Elsewhere in the country
The Washington region is far from alone in its scramble to figure out what the IRS announcement means for residents. Kaeding, the Tax Foundation economist, said high-taxed regions with high-income residents, including Philadelphia, New Jersey and New York, are all wading through this same confusion.
New York Gov. Andrew M. Cuomo (D), who issued an executive order last week allowing residents to prepay at least a portion of their property taxes, threatened legal action against the federal government Thursday over the change in these deductions.
In deep blue California, residents are not permitted to prepay their property taxes for 2018 because their properties have not yet been assessed, according to the San Jose Mercury News.
And in New Jersey, outgoing Gov. Chris Christie (R) signed an executive order Wednesday calling on municipalities in the state to accept prepayments for at least the first and second quarters.
Many jurisdictions in the Garden State, including the Township of Montclair, have already issued first and second quarter tax bills for 2018. Montclair has seen a rush of people attempting to make prepayments, according to its website, and is keeping government offices open over the weekend to accommodate them.
"Given the recent influx of queries to the Township regarding 2018 property tax pre-payment, we decided to provide additional time on a Saturday for those residents and business owners who wish to pay their 2018 taxes in advance," Mayor Robert Jackson said in a news release.
Peter Jamison and Rachel Siegel contributed to this report.