With 2017 coming to an end and the new 2018 federal tax.
taking effect soon, some residents are hustling to pay their taxes before the big change.
However, one local myth — the ability to pay 2018 property taxes in 2017 — has caused many county treasurers’ phones to ring with questions about how to pay early. The short answer is Wisconsin residents cannot pay next year’s property taxes in the current year and never could have, according to a state statute.
State statute 74.13, taxes paid in advance of a levy, states “general property taxes, special assessments, special charges and special taxes may be paid in advance of the levy during the period from August 1 until the third Monday in December each year.” The statute only pertains to paying ahead on the current year’s taxes.
Under the new tax law, a cap is placed at $10,000 for those who want to deduct payments for state and local taxes. That will impact some residents in Racine County with high property taxes.
But in states like Minnesota, Maryland, and Virginia, residents have been preparing this year’s property taxes in order to avoid the $10,000 cap.
The new federal tax bill was signed by President Donald Trump on Friday.
Racine County Treasurer Jane Nikolai said her office has been receiving several calls the last two weeks about payment of 2018 property taxes.
“People are scrambling and trying to take advantage of the old rules, so they want to prepay their 2018 (taxes) in 2017, so they’re fully deductible. But they can’t,” Nikolai said. “They cannot prepay their 2018 taxes any earlier than Aug. 1, 2018.”
Nikolai said that despite residents in other states being able to prepay their 2018 property taxes, “here in the state of Wisconsin that is not an option.”
“Because of this law change, where you’re capped at $10,000 starting in 2018, some people will no longer be itemizing (their taxes), they’ll be taking the standard deduction,” Nikolai said. “So they won’t get that itemized deduction credit.”
For those wanting to pay their 2017 taxes, including property taxes, before the new law goes into effect, Nikolai said they should pay them before the end of this year — especially those above the $10,000 cap. Otherwise, “They’ll lose the rest of that deduction.”
“There will definitely be people who will have more taxable income
starting in 2018,” Nikolai said.
The Alternative Minimum Tax is a very important consideration for taxpayers who own real estate because just about every tax rule applying to real estate is different for the AMT than it is for the Regular Tax. This article on Real Estate and the AMT will address those situations where the individual holds the real estate as an investment, typically as a rental property. The differences in tax treatment between the Regular Tax and the AMT can be significant.
Interest expense a sentence for deigning.
Interest paid on the mortgage was taken out to acquire the property is fully deductible, both for the Regular Tax and the Alternative Minimum Tax. Unlike itemized deductions that allow a tax benefit for what amounts to personal expenses, the tax law generally allows all deductions a taxpayer has to make in the pursuit of business income. Thus, the limitations discussed in the previous article on home mortgage interest do not apply.
Suggestion – it is best that taxpayers keep personal borrowings separate from business borrowings. Mixing the two creates recordkeeping challenges and can result in disputes with the IRS.
Property taxes deduction example in literature.
Property taxes paid on rental or investment property are allowed in full both for Regular Tax purposes as well as for the Alternative Minimum Tax.
Planning idea – if you have an opportunity to pay your property tax bill either this year or next, pay it in a year when you have enough income from the property so as not to generate a rental loss. This strategy can help avoid triggering the passive activity loss limitations described below.
Planning idea – for personal property consider electing the straight-line method for Regular Tax purposes. While giving up a little tax benefit from the greater depreciation in the early years, it could mean avoiding paying the AMT.
The at-risk rules similarly deny using these types of losses to the extent the taxpayer has acquired the investment with borrowed money and does not have personal liability on the debt.
If these loss limitations apply, consider the planning ideas mentioned above to minimize the losses being generated each year. They are not doing you any good anyway.
Sale of the property
Several different AMT issues can arise on the sale of rental/investment property. One is that your gain or loss may be different for the AMT than it is for Regular Tax purposes. This would be caused if different depreciation methods were used. For example, if the personal property was depreciated using an accelerated method for Regular Tax purposes, then the basis in that property when calculating gain or loss on sale would be different because the straight-line method had to be used for Alternative Minimum Tax purposes.
Gain on the sale of investment property generally is capital gain, although a portion may be treated as ordinary income depending on the accelerated depreciation method was used. Capital gains in and of themselves are not an AMT item, but nonetheless, they can result in AMT being paid. This is because the AMT exemption amount is phased out for taxpayers at certain income levels, so this addition
Some ‘annoyed’ by change
Caledonia resident Fran Martin said she’s “annoyed” with some of the upcoming changes that will directly impact her.
“My combined real estate plus state income taxes exceeds $10,000, which is no longer going to be deductible,” said Martin, who is also chairman of the Village of Caledonia Community Development Authority deduct antonym.
In an effort to make up for the deduction losses, Martin said she plans to make her 2018 charitable deductions in 2017.
“I’ll make the charitable deduction that I would’ve made in 2018 this year because it will be a tax benefit and it won’t be next year if I don’t itemize,” Martin said.
She also said she’s frustrated that residents of other states can pay this far in advance, but Wisconsin can’t. “I don’t like being disadvantaged relative to other states, which I believe we are in Wisconsin,” Martin said.
Mount Pleasant Village Clerk Stephanie Kohlhagen said some village residents will be affected by the deduction cap, but many will not deduct in a sentence.
Kohlhagen said it would be a “logistical nightmare” for the village to keep track of property tax payments so far in advance.