Mnuchin Defends IRS Position on Prepaid Property Taxes

Treasury Secretary Steven Mnuchin defended the IRS’s position on the deductibility of prepaid 2018 property taxes before lawmakers on January 30. Mnuchin testified before the Senate Committee on Banking, Housing and Urban Affairs. Mnuchin did not signal any change in the IRS’s position.

Comment. Pending legislation in the House would permit taxpayers to deduct 2018 property tax prepayments on their 2017 returns (TAXDAY, 2018/01/24, C.1). The bill has been referred to the House Ways and Means Committee, where it faces an uncertain future. Ways and Means Chair Kevin Brady, R-Texas, has not indicated his support for revisiting the Tax Cuts and Jobs Act (P.L. 115-97).


Annual itemized deductions for all nonbusiness state and local taxes, including property taxes, are limited after 2017. News of the limitation encouraged many individuals to try to prepay their 2018 property taxes before January 1, 2018. Some jurisdictions accepted prepayments in the final days of 2017; others did not.

Comment. “The Tax Cuts and Jobs Act allows state and local income and property taxes to be deducted up to $10,000. This effectively amounts to a repeal of the deduction for state and local income taxes for high-income individuals and can be expected to have a particularly adverse effect on high-tax states such as New York and California,” Peter Faber, Partner, McDermott Will & Emery, New York, told Wolters Kluwer.

Prepaid Property Taxes

On December 27, 2017, the IRS posted a news release, IR-2017-210, which many taxpayers interpreted as squashing prepayments. According to the IRS, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 “depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018.”

Comment. “The IRS position means that voluntary prepayments that are not assessed will not be deductible when paid. It is not clear that a court would support this position,” Faber noted.


“The IRS advisory is confusing and plain wrong,” Sen. Bob Menendez, D-N.J., said. “The Tax Cuts and Jobs Act specifically prohibits the deduction of prepaid state and local income taxes. The law is silent on the prepayment and deduction of property taxes. They should get their deduction,” Menendez added.

“I don’t think the IRS announcement was confusing,” Mnuchin said. “The intent was that it wouldn’t allow taxpayers to abuse the system. It was intended for clarification,” Mnuchin added.

California’s Response

On January 30, the California Senate approved a bill to “work-around” the limitation on the state and local tax deduction, according to its sponsor. The bill allows taxpayers to make charitable donations to the California Excellence Fund, and receive an 85 percent tax credit for their contribution. “The taxpayer will then be able to deduct the contribution from both state and federal taxes,” Sen. Kevin de Leon, D-Los Angeles, the bill’s sponsor, said. According to de Leon, 17 states use similar models to fund education.

By George L. Yaksick, Jr., Wolters Kluwer News Staff

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All stories by: CCHTaxGroup