The State and local tax (SALT) deduction is limited to $10,000 for tax years beginning 2018. As such there has been confusion as to whether a taxpayer can prepay 2018 SALT in 2017 and take a full deduction in 2017 thereby avoiding the $10,000 limitation in 2018. As to Colorado, this has been my experience.
To put this in context, this refers to cash method taxpayers. Under certain circumstances, cash method taxpayers may prepay liabilities to take a deduction in the year paid as compared with year accrued. As such, if a Colorado county would not accept payment of a 2018 tax due, then the cash method defeats the prepayment strategy, not the new tax bill.
The cap includes both real estate and income tax. State income tax cannot be prepaid because of the second to last sentence of the amendment below. However, real property tax can possibly be prepaid. Whether the real property tax can be prepaid depends on whether 2018 real property tax has been assessed by that particular county. Denver has assessed 2018 and it is payable now so Denver could be prepaid. I checked some other counties and visibility is not clear so call to check with your particular county as to whether the real property tax has been ASSESSED. If so, and the combined anticipated 2018 SALT (income and property tax) exceeds $10,000), go pay that real estate tax for some tax savings.
It has been my experience in real estate transactions to provide a credit to purchasers for the prior year real estate taxes because they were assessed although not yet due. This provides further basis to make the case that prepaying 2018 tax is a deduction in 2017.
I have received a case example from a reader of this post. Taxpayer went to the Arapahoe County Treasurer today, December 29, 2017. The Treasurer informed taxpayer that Arapahoe considers the tax assessed on May 1, when they value properties. He promptly paid his 2017 taxes due 2018 and the treasurer gave him a receipt with 2017 printed on it.
Colorado does seem perfectly aligned to prepay your taxes due 2018 in 2017 for a deduction in 2017 to thereby avoid the $10,000 cap in the new bill. Of course, there is AMT!
Here’s the text:
SEC. 11042. LIMITATION ON DEDUCTION FOR STATE AND LOCAL, ETC. TAXES. (a) IN GENERAL.-Subsection (b) of section 164 is amended by adding at the end the following new paragraph: ”(6) LIMITATION ON INDIVIDUAL DEDUCTIONS FOR TAXABLE YEARS 2018 THROUGH 2025.-In the case of an individual and a taxable year beginning after December 31, 2017, and before January 1, 2026- ”(A) foreign real property taxes shall not be taken into account under subsection (a)(1), and ”(B) the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this subsection for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return). The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212. For purposes of subparagraph (B), an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, shall be treated as paid on the last day of the taxable year for which such tax is so imposed.”. (b) EFFECTIVE DATE.-The amendment made by this section shall apply to taxable years beginning after December 31, 2016.
Also review the IRS bulletin on this topic: https://www.irs.gov/newsroom/irs-advisory-prepaid-real-property-taxes-may-be-deductible-in-2017-if-assessed-and-paid-in-2017.