New Tax Law Creates One-Time Loophole for NJ Residents to Save Thousands in Federal Income Taxes
Written by: Matthew L. Devine and Francis J. Sullivan
Beginning in the 2018 tax year, individuals claiming a deduction for taxes paid to state and local governments on income, property, or sales taxes (the so-called “SALT” taxes) will be limited to claiming only $10,000 of such taxes on their federal returns. However, property-owners in New Jersey can take advantage of a one-time-only opportunity to side-step this new cap by prepaying their 2018 local property taxes on or before December 31, 2017. Doing so could help save the average New Jersey taxpayer more than $2,500 in future federal tax liability as a result of the new 2018 limits, with even greater savings for taxpayers with combined household incomes over $200,000.
How the SALT Deduction Works
Under the current federal tax code (the “Code”), individuals may elect to take either the standard deduction available to all taxpayers (valued at $6,350 for individuals and $12,700 for joint filings) or a deduction for various itemized expenses set forth in the Code. The deduction for SALT taxes is only available to those who choose to itemize their expenses, and, as a result, is generally more valuable to higher-income earners than lower income earners. Thus, according to the nonpartisan Tax Policy Center, only 20% of households earning less than $50,000 a year claim the SALT deduction, whereas more than 90% of households earning more than $200,000 a year claim this deduction.
Functionally, the SALT deduction has two parts. First, all taxpayers may deduct from their federal returns all property taxes paid to state or local governments. Second, taxpayers may also deduct either (1) the amount of income tax paid to state or local governments; or (2) the amount of sales tax a taxpayer paid in a given year. For individuals in states or jurisdictions that impose income taxes (like New Jersey), most taxpayers will choose to deduct the amount paid in state or local income taxes. Accordingly, a taxpayer who claims the SALT deduction will combine his or her property and state and local income tax liabilities and deduct that amount from his or her gross income in that year before applying the applicable federal tax rate to determine the total amount of federal income tax due.
Changes to Federal Tax Code
Beginning in 2018, individuals who claim the SALT deduction will only be able to deduct up to $10,000 of their SALT taxes. However, because the current tax year allows for an unlimited deduction for SALT taxes actually paid in a given year, individuals may be able to sidestep this $10,000 cap in 2018 by prepaying SALT taxes in 2017. Taxpayers who prepay their 2018 SALT tax liability in 2017 will still be able to take an unlimited SALT deduction in 2017 for payment of any 2018 tax liability.
Unfortunately, the new federal tax reform law prohibits an individual from claiming a 2017 SALT deduction for the prepayment of his or her 2018 state and local income taxes. However, no such prohibition exists for those seeking to claim a 2017 deduction for prepayment of their 2018 property tax liability. Thus, an individual’s ability to take advantage of this opportunity depends on whether or not his or her local municipality is able to accept such prepayments.
Currently, this means that this tax-planning opportunity is only available to those who pay property taxes in New Jersey. Individuals who pay Pennsylvania property taxes are unable to take advantage of this opportunity due to certain structural differences in Pennsylvania’s tax collection system.
How to Make Your PrepaymentsFor most New Jersey residents, prepayments of property taxes can be paid directly online by visiting your local municipality’s tax collection website. All others should contact their local municipal tax collector to learn if prepayment of property tax liabilities is available to them.
We recommend that your consult your own tax advisor to determine if the prepayment of 2018 New Jersey real estate taxes in 2017 would be beneficial for you.