Did you pay a portion of your 2018 property taxes at the end of last year so you could deduct them on your 2017 tax return?

If so, you need to be aware of something very important, according to Ralph Thomas, the CEO and executive director of the New Jersey Society of Certified Public Accounts.

“There is a difference between the federal treatment of pre-payment of taxes versus what’s done from a state perspective, based on our read and discussions with the Division of Taxation,” he said.

The federal statute allows you take a deduction for taxes that have been billed or assessed — and many municipalities in Jersey start their fiscal years July 1, so the year runs until the following June 30.

He said that means your assessed property taxes would include the first and second quarter of 2018, and so “if a taxpayer pre-paid those in 2017, they’re able to deduct them on the federal return.”

However that’s not the case when it comes to your New Jersey state income tax return.

“You can only deduct taxes that are for the calendar year, up to the $10,000 level," Thomas said.

He stressed “based on our read, our discussions with the Division of Taxation, the property tax year must match the income taxed year.”

Thomas said the following two examples clarify what he’s talking about:

Example A

If a homeowner’s property taxes are $8,000 per year and the person paid all of his or her 2017 property taxes ($8,000) during 2017, and also prepaid the first two quarters of the 2018 property taxes ($4,000) at the end of December last year, then on that person's 2017 federal tax return, the individual can claim a property tax deduction of $12,000, which is the total of all property tax payments paid in 2017.

However on that person's 2017 New Jersey tax return, he or she can only claim a property tax deduction of $8,000, which is the total of all property taxes assessed in 2017.

The $4,000 prepayment of the 2018 property taxes will be deductible on the 2018 New Jersey tax return, even though the payment was made in 2017.

Example B

This homeowner's property taxes are $12,000 per year. He or she paid all of the 2017 property taxes ($12,000) during 2017 and also prepaid the first two quarters of the 2018 property taxes ($6,000) at the end of December last year.

On the individual’s 2017 federal tax return, he or she can claim a property tax deduction of $18,000 — the total of all property tax payments paid in 2017. But on this person's 2017 New Jersey tax return, he or she can only claim a property tax deduction of $10,000 — the total of all property taxes assessed in 2017, with a cap of $10,000 per year.

The $6,000 prepayment of this person's 2018 property taxes will be deductible on his or her 2018 New Jersey tax return, even though the payment was made in 2017.

Thomas also stressed some New Jersey residents may not realize there is a $10,000 limit for the amount of property taxes they can deduct on their state income taes.

“I’m sure there are a lot of people that aren’t aware of that. Even if they read the statute in the code for New Jersey, they may have misinterpreted it," he said.

He added after the recent tax law change by Congress, “we would always advise that an individual should consult a CPA or a tax professional, just to make sure they’re not putting themselves in harm’s way.”

Thomas also pointed out all of the recent tax changes, “refunds may be delayed because of additional scrutiny that’s going to be taken, we believe both at the state level and the federal level.”

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You can contact reporter David Matthau at David.Matthau@townsquaremedia.com