Rushing to prepay your taxes? Not so fast, IRS says

Less than a day after the IRS declared that some taxpayers might not be able to claim deductions from prepaying their 2018 local taxes, government officials across the region and beyond scrambled Thursday to interpret and respond to the unexpected warning.

The IRS advisory, issued late Wednesday, seemed to throw a wrench in efforts by thousands of taxpayers to get the biggest benefit before the new federal tax law takes effect next week. It said taxpayers can't claim deductions for prepayments on estimated local taxes, just for taxes that have been calculated and assessed by their municipality this year.

Whether taxpayers who already rushed to pay 2018 property taxes will still somehow be allowed to deduct those payments remains "the big open question," said Nicole Kaeding, an economist for the Tax Foundation. "The worst case is that individuals have actually given an interest-free loan to their municipal government."

Though it is likely too late for local governments to issue last-minute tax bills or blanket assessments to let taxpayers prepay their 2018 bills, lawyers and government officials have been examining the issue. Kaeding predicted "there would likely be some litigation next year for individuals who have already prepaid."

Taxpayers can rest easy in Philadelphia, where officials said prepayments fit the IRS guidelines. The city sent out its 2018 tax bills  this month and payments are due at the end of March. About 14,000 prepayments, totaling $32 million, have been made so far, city spokesman Mike Dunn said Thursday. At this time last year, Dunn said, the city had received just $4.9 million.

And the IRS news didn't seem to slow the pace of prepayment activity in some communities. In Haddonfield, tax collector Terry Henry said his office had been even busier Thursday than the day before, with more than 100 residents making such payments before mid-afternoon.

"We've been actually doing two stations today," he said.

The new law raises the standard deduction for a couple to $24,000, but limits the state and local tax deduction for those who itemize. The new $10,000 cap will have a significant impact in high-tax states like New Jersey, which has the highest property taxes in the nation. Gov. Christie signed an executive order Wednesday instructing all municipalities to accept prepayments. But it came before the IRS advisory.

Pennsylvania officials in many municipalities have been hesitant to take similar steps. Montgomery County's treasurer forbade its municipalities from doing so, saying it was not permitted under state law. And state officials announced Thursday that Pennsylvania cannot issue an order like Christie's.

State law "does not specifically address the situation that many in the commonwealth are now facing," the state's Departments of Revenue and Community and Economic Development said.

Pennsylvania officials also directed residents to the new IRS guidelines and encouraged residents to speak with their own financial advisers or accountants.

In Haddonfield, Henry said taxes had already been assessed for the first and second quarters of 2018, so residents could prepay them and claim the deductions. His office had been allowing residents to estimate and pay their taxes for the second half of next year — the kind of prepayment that the IRS said is not deductible and may have to be refunded.

"We're still taking it," he said. "And if it gets kicked back, it gets kicked back."