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Many Bay Area homeowners are rushing to pay their spring property tax installments in an attempt to squeeze a last deduction in this year before the GOP tax plan takes effect. But there’s still a lot of confusion over what taxpayers can pay in advance and what they can’t.
Here’s the short form: You can’t pre-pay your 2018 state income or property taxes. But you can pay the last installments of your 2017 taxes — which are not due until next year — before 2018. If you itemize, doing so could save you big money on your federal tax bill this year.
(For a look at how a new IRS advisory on prepaying property taxes fits into all this, click here.)
Starting next year, the tax overhaul that President Donald Trump signed into law Friday caps the deductions for state and local income and property taxes at $10,000 combined, a major blow to homeowners in expensive housing markets like the Bay Area. If you pay more than that and itemize your taxes, it makes sense to try to pay as much of your California and local tax bill before 2018, when you can still use the old rules to take a larger deduction.
“California is treated very poorly with this new tax bill,” said Larry Stone, the Santa Clara County Assessor, “but there is a benefit you can get here.”
California taxpayers pay their property taxes in two installments, due in December and April. Conventional wisdom has long held that it’s better to wait to give your money to the taxman, and many people don’t pay until the deadline.
But that’s not necessarily the best plan this year. Paying that second installment by Dec. 31 could make a substantial difference: If you own a $1 million home, for example, you could save more than $1,000. (With a one percent property tax rate, you would owe $10,000 annually, or $5,000 due in April. If you’re in a 25 percent tax bracket, that equals a $1,250 deduction that could be lost if you wait until 2018.)
A large number of people could benefit: More than 6 million people in the Golden State claimed state and local tax deductions in 2015.
One big question looms, though: Do you have the cash now after splurging on holiday gifts? If you can’t pay off those credit card bills next month, will the interest that starts piling up erase any tax savings?
Tax assessors in the Bay Area have seen a flurry of financially-savvy-yet-frustrated homeowners rushing in to pay their second installment before the end of the year, and officials have been inundated with calls and questions from people hoping to do the same.
“It’s normally dead in our lobby” at this time of year, said Emily Harrison, the Santa Clara County Finance Agency director. But this year, “we’ve had quite a bit of activity,” she said. “People are taking advantage of it.”
In Alameda County, the tax collector’s office is urging residents to come to their office in person before 5 p.m. on their last day of business, Friday, Dec. 29, to ensure that their tax bill gets recorded. In Contra Costa and Santa Clara counties, you can pay your tax bill online right up until 11:59 p.m. on Dec. 31. In Santa Clara, you can also pay a portion of the second installment, rather than the entire thing.
Julie Manaois, the deputy tax collector for Alameda County, said her office had seen an 11 percent increase in the total amount of tax collected between Jan. 1 and Dec. 20 of 2017 compared with the same time period in 2016. She suspected the increase was in part due to more people paying the second installment early.
Manaois said she expects a line trailing out of the office on Friday evening. “We’ll be ready for that,” she said.
One big catch for taxpayers who take lots of deductions: You won’t benefit by paying your property tax installment early if you’re required to pay the dreaded Alternative Minimum Tax, or AMT. And the GOP tax bill will make fewer people subject to the AMT in 2018. So if you have to pay the AMT in 2017 but not in 2018, it would likely be better to wait to pay your second property tax installment until after New Year’s. Consulting a tax expert is the best way to find out.
Some taxpayers have been disappointed that they can’t make an even larger payment now on their 2018 bills in order to deduct more on their 2017 federal taxes. But that’s just not possible, officials around the region stress.
“We couldn’t magically create these 2018 bills so these people have a place to park their money,” said Russell Watts, the treasurer-tax collector of Contra Costa County. “Our system wouldn’t be able to handle receiving these payments.”
When it comes to state income tax, the GOP tax bill has provisions written into it preventing people from getting any deduction by prepaying their 2018 tax bill. But if you pay quarterly estimated taxes — common for freelancers — or if you expect to owe more in 2017 state income tax than you’ve been withholding from your paycheck, it could make sense to make an estimated state tax payment before the end of the year. That way, you can deduct more from your 2017 federal tax bill before the $10,000 cap kicks in in 2018.
Stone recommended that people talk to their accountants or a tax preparation specialist before deciding what to do. “You have until the last day of the year to make up your mind,” he said.
The tax bill will also lower the cap on the mortgage interest deduction, from a $1 million mortgage to $750,000. That won’t affect current mortgages. If you’re in the process of buying a new home, however, it could affect you.
If you haven’t signed your mortgage contract yet, it’s too late — the deadline for beating the new tax bill’s $750,000 cap on mortgage interest was Dec. 15. If you did sign your contract before that date, you’ll need to close by April in order to take advantage of the $1 million cap that existed until now.
Other tips for folks looking to minimize their tax bills:
Consider donating more to charity before Dec. 31. Many more taxpayers next year will be taking the standard deduction, which nearly doubles to $12,000 for singles and $24,000 for couples — especially because they’ll have less incentive to deduct state and local taxes. And those who do take the standard deduction will get no tax benefit from any charitable donations they make, since they’re not itemizing.
“If you have the cash now, it’s better to load up on charitable donations this year,” said Andrew Jones, a tax attorney in San Francisco. “As the standard deduction goes up, you’re basically going to get no benefit from it.”
If you own a pass-through business, like a law firm or a doctor’s office, consider waiting to send your end-of-year invoices until the first days of 2018. Under the tax bill, all income from pass-through businesses will be taxed at a lower rate, so delay as much of it as you can until the new year in order to benefit from the more generous tax scheme.
More broadly, there will be a big incentive next year for more workers to reorganize their income into pass-through businesses — freelancers, for example, could set up a corporate vehicle to take in their income. “We may see be a big push toward forming and conducting business through the corporate form,” Jones said.
