Federal Income Tax: IRS muddies the waters on pre-payment of 2018 real estate taxes, but our “advice” stands: Pay them now!

Last week, Congress passed and President Trump signed the most sweeping tax reform package in more than two decades.  And one significant provision of that bill as to individuals is the cap on deductibility of state and local taxes at $10,000 in tax year 2018 and going forward.

This led to our “advice” here that Ohio taxpayers may want to pay their entire (both halves) 2018 real estate tax bills before year’s end to attempt to grab that additional (and perhaps final) deduction in 2017.

(Let us emphasize again the word “may.”  Your specific situation may differ.  Consult your tax professional for advice as to your specific circumstance.)

IRS Advisory muddies the waters

Since that advice, the IRS has muddied the waters by issuing this advisory.  In there, they caution that the 2017 deduction (already condition based upon individual circumstances) applies only if taxes are “assessed” and “paid” in 2017.

(OK, this is going to get confusing.  Perhaps we know “too much” about Ohio real estate taxes making this so complicated.)

What does “assessed” mean?

What exactly does “assessed” mean?  In Ohio, taxes are “a lien on the real estate” for the tax year in question on January 1 of that year.  Since the proposed-to-be-pre-paid 2018 taxes in Ohio are in fact the 2017 taxes (confusing we know, but Ohio real estate tax law is intentionally confusing), then they would seem to be “assessed” as of January 1, 2017, at least as to how this author sees things.

But even though taxes are a “lien” and are “assessed” as of January 1, 2017, when they are “determined” as to amount is another matter.

In Ohio, as in most states, property taxes are a product of multiplying the tax rate times the assessed valuation of property.  For every County in southwest Ohio (except Warren) and most major urban counties in Ohio (Hamilton, Butler, Clermont, Montgomery, Franklin, and Cuyahoga), 2017 is a new “re-valuation” year, meaning that the bills coming out in 2018 will have brand new valuations.  Those valuations were only finalized by the various county auditors in September or October of this year.

Then, the rate.  Tax rates are determined in Ohio for the tax year in question only after the November election results have been finalized.  Levies passed in that election apply retroactively to January 1 of that year, here 2017.

Does “assessed” mean “determined”?

Now this is where it gets super-confusing.  From our perspective, taxes have been assessed for 2017 (payable in 2018) as of January 1 of this year, but the amount of the tax bill in some counties was only very recently determined (and as to Warren County as of this writing has not yet been determined).

So, if the IRS means “determined” in terms of amount when saying “assessed,” then it derives the entirely illogical and unfair result that folks who pre-pay their real estate tax bills in 2017 in Hamilton, Butler, and Clermont Counties can deduct those payments, but folks in Warren County, where that determination appears to be lagging for a few days or weeks, cannot.  It makes utterly no sense.

(As we wrote here, In Warren and certain other counties where the amount has not been finally determined, your 2017 tax year payment may be based on the amount you paid for the 2016 tax year payment.)


Given the last-minute scramble that Congress created with the passage of tax reform, it is from our perspective inexcusable that the IRS chose to inject this uncertainty into what otherwise should be a straightforward matter.  But that is the nature of this federal agency.  Why make things simple, when they can be hopelessly complicated?

However, as to prepayment of Ohio taxes, our advice set forth in our original email and blog entry stands: Pay them now.  The worst-case scenario is that you will have paid the taxes, respectively, one month and seven months too early.  No real harm.  But if we are “right” that they are deductible if paid this year, but may not be next year, then it means a 25% to 39% “savings” on that payment for you (because of the deduction).

Thus, pay them now!

Read more

Read more about the last-minute confusion created by the IRS below:

Washington Post: If you prepaid property taxes, will you get the deduction? If not, can you get your money back?

New York Times: Prepaying Your Property Tax? I.R.S. Cautions It Might Not Pay Off

We hope this clarified things, and did not further confuse them for you.

Attorney | ‭513-943-6655 | [email protected] | + posts