Did You Lose an Important Income Tax Deduction?
Over the past month or two, we have striven to bring you the latest news on the new income tax plan recently passed by Congress. While the impact of the new laws will vary from one person to the next, one issue is likely to affect many California residents: The popular deduction for state and local taxes has been limited to $10,000 per year.
To some extent, this news could have been worse. Many lawmakers originally wanted to axe the deduction altogether! Still, limiting the tax provision to $10,000 annually might cost some of you a bit of money. That’s because our property taxes here in California tend to be relatively high, compared with the rest of the nation. A lot of you probably depended on that deduction to lower your taxable income each year.
Since the new deduction limit won’t take effect until it’s time to file your 2018 federal income tax return, some homeowners scurried to their local tax offices to prepay property taxes for this year. That way, they could possibly still utilize a large income tax deduction for 2017. But, as you might have heard, you could only take that action if your 2018 taxes had already been assessed. Those who attempted to estimate this year’s property tax bill, and prepaid it to access a larger deduction for 2017, might find themselves disappointed to learn that the effort was essentially fruitless.
So, does that mean you won’t be able to deduct property taxes (or other state and local taxes over $10,000) on next year’s tax return? Possibly, but because this issue so deeply affects those living in high-tax areas, many local governments are looking for a creative workaround.
In New Jersey, for example, some localities are considering a move toward a municipal “charitable fund”. Theoretically, those who make a contribution to the local fund would receive a credit in that amount toward their property tax bill. And guess what: Charitable contributions are still deductible, subject to certain limits, on your federal income tax return.
Will local governments in California consider similar plans? There’s no way to know for sure at this point, but depending where you live, your city planners might already be considering the issue. Over the next year or two, it is possible we will see some changes in local tax structures, in order to accommodate homeowners impacted by the new income tax deduction limits. We can’t be sure of these exact changes, of course, but contacting your local representatives to express your views is always a good idea.
We will continue to keep you informed on this, and other tax issues, that might affect you. In the meantime, you can contact our real estate attorneys for more information specific to your situation.