With the new federal tax overhaul capping state and local deductions in 2018, filers in high-tax states rushed to prepay their property taxes last month.
While most governments are still assessing the response, early data in the jurisdictions that accepted prepayments suggest that a significant portion of property owners took advantage of the opportunity.
In San Diego County, for example, one-quarter of taxpayers -- nearly 72,000 people -- paid their spring 2018 property tax bill in December, sending $312 million to the county treasurer. In the District of Columbia, 7,500 taxpayers sent in more than $50 million in early payments. And in Montgomery County, Md., roughly 2,000 residents showed up over three days to prepay their tax bills in person. The county tax office also received 20 boxes of mail by Jan. 1, meaning another approximately 10,000 bills were likely paid by mail, according to county spokesman Patrick Lacefield.
Taxpayers were motivated to prepay because starting this year, federal tax revisions will cap at $10,000 the amount of state and local taxes that can be deducted from a filer's declared income. Property owners in high-tax states generally pay much more than $10,000 in state and local taxes. For instance, the average New Jersey taxpayer deducts nearly $22,000.
Many jurisdictions adjusted their policies to allow residents to prepay their 2018 property tax bill, which may let them deduct that early payment from their 2017 income.
But not all early filers may actually get to deduct their 2018 tax payments from their 2017 income. On Dec. 27, the Internal Revenue Service issued a memo saying that only property taxes paid on properties assessed in 2017 could be deducted from that year's income.
That memo led to confusion among local governments about how or whether to even accept early payments at all. In New Jersey and New York, Govs. Christie and Andrew Cuomo went ahead and issued executive orders authorizing local governments to accept prepayments. Other jurisdictions accepted them with a disclaimer that warned residents they may not be eligible to prepay.
While the number of filers who have prepaid so far is impressive, San Diego County Treasurer-Tax Collector Dan McAllister says governments need to be careful to remember that the payments aren't exactly free money. They are simply a portion of what the county expected to receive anyway -- just up to a year early.
McAllister says that San Diego County, for its part, will deposit the prepayments into its investment pool, which means the pool will earn about $1.5 million more in interest than initially expected. "It's easy to look at the $312 million and say it's a windfall," he says. But to determine if your government will actually see more revenue, "you have to look at what that money is going to earn."