Taxpayers dealing with New Tax Bill by prepaying Real Estate Taxes may miss boat as one Tax Pro Recommends paying their January Mortgage Payment by December 31st instead

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Taxpayers have been rushing to prepay their 2018 real estate tax before year's end since the new tax bill limits tax deductions starting in 2018. Charles Markham, EA, MST, a 25-year veteran tax professional in MA, argues this conventional wisdom is wrong and recommends instead that taxpayers prepay their January 1st mortgage payment by December 31 instead, and here's why...

The conventional wisdom of prepaying their real estate taxes may not help many taxpayers and may in fact make their lives worse by messing up their mortgage escrows. Prepaying one month's mortgage interest is the better strategy.

A lot of taxpayers (and their tax advisors) are scrambling, trying to figure out what to do now that the tax act has passed Congress. One of the most frequent pieces of advice being given these days is that taxpayers should "prepay their real estate taxes for 2018 before December 31, 2017" to get the tax deduction on their 2017 taxes.

Charles Markham, a 25 year veteran tax professional in Norwell Massachusetts, advises that for many taxpayers, this strategy is not the right one. However, a simpler strategy may save some tax dollars before year's end.

Markham notes the issue with prepaying real estate taxes is that many taxpayer will still be subject to Alternative Minimum Tax ("AMT") in 2017. Without going into the details, if a taxpayer is subject to AMT, prepaying real estate taxes in 2017, won't make a bit of difference on their 2017 taxes, rendering the strategy useless.

How can one tell if they are subject to AMT? Look on their 2016 taxes, if there's a number on Line 45 of Form 1040, they were subject to AMT and most likely will be again in 2017. Cancel that special trip to City Hall to prepay those 2018 taxes.    

But might such a taxpayer not be subject to AMT in 2017? "Well, that's true," says Markham, "and prepaying won't hurt, and it could help, but if you pay real estate taxes via a mortgage escrow, this can complicate things with your mortgage company."

Markham notes that the taxpayer will then have to sort this out with their mortgage company who will likely either still send in the real estate tax payment anyway creating a refund situation at city hall, or they won't send it in which creates an "overage" in the escrow account, and the taxpayer must then put in for a refund. "If you pay your real estate taxes via your mortgage company, there's a good chance that prepaying them may be more hassle than it's worth. But perhaps they're the kind of the person that likes to sit on the phone for an hour or two and talk with strangers."

Instead, Markham recommends a simple alternative--pay the mortgage payment that is due on January 1st in late December, making sure the mortgage company actually has it posted before the end of December. Don't just mail it in. It's not a matter of the postmark date. Why do this? Because the January 1st payment is really paying December interest, Thus, people can pay thirteen months of interest in 2017. Note this only works for January's payment, not February's or March's, etc.

Why is this a good idea? Doesn't this just mean the taxpayer would only then have eleven months of interest in 2018? Typically it would, but under the new tax law, many taxpayers will never be itemizing again! How can a taxpayer tell if they won't be itemizing in 2018? Once again, refer back to the 2016 Form 1040 as a guide.. Look at the Schedule A. Taxpayers need to understand that in any given year, they either itemize on Schedule A OR they take the standard deduction--whichever is higher. For 2018, the standard deduction has been dramatically raised from $12,600 to $24,000 if you are Married Filing Jointly.

Here's a real life example:
Markham used one of his clients who are upper middle income to make his point. (See the attachments found at http://bit.ly/SchedA2016 and http://bit.ly/SchedA2018 or on the attachments to this) In 2016, this client had approximately $38,000 of itemized deductions (see line 29 of Schedule A). The taxpayers are married filing jointly and the new standard deduction is $24,000 and $38,000 is more than $24,000 so one would assume they still be itemizing in 2018, right? Well, not so fast. Look at line 9 of Schedule A. On the tax return that Markham is using as an example (Markham's practice is in Massachusetts) the number was $26,200, but in 2018 taxes will be limited to $10,000. This means the total itemized deductions on this return would be around $22,000 (all things being equal) and the taxpayers will be taking the standard deduction since the $24,000 standard is more than $22,000. Thus, get that mortgage interest in 2017. In 2018, it would be wasted.

So, getting the January 1st mortgage payment in so it's posted and on the books a few days before December 31 is probably one safe strategy that many taxpayers can make use of that will work for this tax season, and it won't mess up any escrow payments, and mortgage interest is typically never an issue with AMT.

Charles Markham, MST, EA has prepared taxes and represented taxpayers for over 25 years in Massachusetts. He is an Enrolled Agent and is also licensed to practice before the United States Tax Court. More background is on his website, http://www.markhamandcompany.com

For additional information contact Charles Markham at 781-659-6600 or 781-206-4880 or via email or chat via his website. Mr. Markham is available for short interviews via phone, Skype or in person.

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Charles Markham
Markham & Company LLC

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