Can I Prepay Property Taxes for the Year?

You certainly can prepay property taxes for the year — and the city will be delighted if you do. Paying early means they don't have to chase you for payment and the cash is in the kitty to spend on public services. The major consideration is federal income taxes. It's only worth prepaying your property taxes if you get a greater tax advantage from doing so.

Can I Prepay Property Taxes for the Year
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Understanding Federal Tax Deductions

Homeownership comes with a number of benefits, and the biggest one is the ability to deduct property taxes from your federal tax return. In 2017, the national average property tax bill reached $3,296 per year; in nine counties, this figure topped $10,000. So you can make significant savings by deducting these taxes. Paying your property taxes early means you get to deduct them a year earlier than if you paid them on the due date.

Recent Tax Law Changes Caused a Fuss

Recent tax law changes have put property tax deductions under the spotlight. Starting in 2018, the Tax Cuts and Jobs Act of 2017 limits the amount you can deduct for property taxes to $10,000 in any tax year. This led to a flurry of high-dollar property taxpayers rushing to pay their 2018 property taxes in 2017 to take advantage of the 2017 rules when more was deductible. Going forward, under the Tax Cuts and Jobs Act, you can only deduct for property taxes up to $10,000 in a tax year.

Pay Early if You Anticipate an Income Reduction

The more property tax you pay in a tax year, the greater your itemized deductions. To understand the effect of this, you need to figure out whether you'd be better off taking the deduction now or later. One situation where it might be better to pay early is if you anticipate a significant drop in income next year. For example, someone who plans to retire at the end of 2018 and spend a year traveling might choose to pay his 2019 property taxes in 2018 so he can claim the deduction against his larger 2018 taxable income. This way, his tax liability is significantly reduced.

Red Tape Might Get in the Way

There are some practical matters affecting whether you can pay your property taxes early. First, you have to have next year's tax bill in hand to claim the deduction. You cannot simply estimate next year's tax payments and claim the deduction based on anticipated expenses. Second, if you have a mortgage, you likely will need your lender's consent before prepaying. That's because part of your monthly mortgage payment often includes an amount for property taxes, which your lender hands over to the state tax board. Whether you can pay early can depend on whether the bank has processes in place to organize the prepayment and how much notice you need to give them before the tax filing date. However, private lenders might allow homeowners to pay their own taxes if the loan-to-value ratio is below 80 percent so if this is the case, you won't need your lender's consent.

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