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Did paying property taxes early aid 2017 returns? We still don't know

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A sign tells people where to prepay their 2018 property taxes.
A sign posted in front of the the Hennepin County Government Center's real estate service desk informs people that they can prepay their 2018 property taxes in Minneapolis on Thursday, Dec. 28, 2017.
Evan Frost | MPR News 2017

Tens of thousands of Minnesota homeowners paid this year's property taxes before the end of last year. But with the tax filing deadline only about a month away, it's still not clear if the IRS will allow those early payments to be deducted on 2017 federal tax returns.

"Unfortunately, that's where we stand right now. There is no guidance and certainty whether they will accept it or not," said Geno Fragnito, government relations director for the Minnesota Society of Certified Public Accountants

Because of some big changes in federal tax rules that take effect this year, there will be a cap on the deduction of state and local taxes. And standard deductions are rising so much that many taxpayers will find it no longer makes sense to itemize deductions.

There will be a $10,000 limit on the deduction of state and local taxes. And the standard deduction for an individual nearly doubles to $12,000. For couples, it hits $24,000.

Many taxpayers saw they would get little or no tax benefit for property taxes paid in 2018. So, they paid those taxes in 2017, figuring they could increase their deductions and cut their federal tax obligations.

It looked like a smart financial move for people who had money to pay taxes early.

Patricia Eid of Arden Hills was among the folks who decided to go that route.

"We called our accountant and asked him if he recommended that we pay early. and he said, "Yes," she said during an interview last December.

Eid and her husband elected to make advance real estate tax payments not just for their Minnesota home but also their Wisconsin cabin.

People line up at the Hennepin County Government Center.
People line up at the Hennepin County Government Center in Minneapolis to prepay their 2018 property taxes on Thursday, Dec. 28, 2017.
Evan Frost | MPR News 2017

Gretchen Artig-Swomley of Gem Lake also went to Ramsey County offices last December to pay property taxes in advance.

"Well, I don't think anybody knows for sure how this is all going to play out," she said at the time. "But if you don't prepay it now, you lose the opportunity to possibly get a benefit from it. And you're going to have to pay it anyway."

The state Revenue Department says it does not know how many people paid their property taxes early. But about two dozen county officials responded to an MPR survey about property tax prepayments.

The responding counties, which included Hennepin, Washington, Ramsey, Anoka and Dakota, indicated they got about 60,000 payments totaling about $350 million.  

Early tax payments were way up over 2016. Washington County, for instance, had 336 prepayments in 2016. But last year, it had nearly 5,000.

But it was a relatively small percentage of taxpayers who made early property tax payments. In Hennepin County, it was less than 10 percent. Advance tax payments in that county totaled about $200 million. But the county collects about $2.8 billion in property taxes annually.

In December, the IRS advised that "in general, 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."

The IRS also said that local law determines whether and when a property tax is assessed. But that "guidance" left a lot of taxpayers and tax professionals wondering if the tax payments were deductible or not. They were left to interpret what the IRS said.

The state CPA society has no official position, but most CPAs are concluding that early property tax payments are deductible, based on what the IRS has said and what state law says about property tax assessments and liability, Fragnito said.

"One could reasonably surmise that it is in fact deductible," he said. "And they (taxpayers) can in fact have it as a deduction."

But Fragnito said there still isn't a yes or no answer from tax officials.

"It's still a situation where the Department of Revenue has said that they're not going to issue anything," he said. "And the IRS has said 'We've issued our guidance.' It comes down, I think, to pointing fingers at each other."

The Minnesota Revenue Department says it's up to the IRS to settle the issue. Spokesperson Ryan Brown said the agency has told the IRS that Minnesota taxpayers and tax preparers need clarity.

"The IRS has the authority and responsibility over whether the pre-paid property taxes are deductible federally for tax year 2017," he said. "Because Minnesota's tax computations start with federal taxable income, the IRS interpretations will determine the issue. "

The issue has the attention of some members of the state's congressional delegation.

"The IRS should help clear up any questions by giving the necessary guidance to American taxpayers and I am urging them to provide this information as soon as possible," DFL U.S. Sen. Amy Klobuchar said in a statement Friday.

DFL U.S. Rep. Betty McCollum is one of 14 House members co-sponsoring a bipartisan bill that would assure taxpayers could deduct 2018 property tax prepayments on their 2017 income tax returns.

McCollum's allies include Republicans from high-tax states like New Jersey. But this is clearly something that would primarily benefit taxpayers in blue states, and Congress is controlled by the Republicans.

The issue could end up before the courts.

"They would have to litigate it, unless there was additional guidance form either a correction bill at Congress or additional guidance from the IRS," said Fragnito of the Minnesota CPA group. "If there's a difference of opinion in the interpretation of a regulation and you can't come to a resolution, then the judiciary is the next step in trying to resolve that."