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The Hot Debate: Can You Deduct Prepaid Property Taxes?

With just two weeks to go before the April 17 deadline, prominent tax advisers still don’t agree on whether all those people who prepaid 2018 property taxes can deduct them in full.

The debate on such deductions arose after Congress passed the largest tax overhaul in three decades late last year. In a landmark change, lawmakers capped write-offs for state and local taxes at $10,000 per return for both single filers and married couples. The provision takes effect for 2018 and will lower these write-offs for millions of Americans.

The overhaul barred deductions for many prepayments of 2018 state and local income taxes, but it was silent on deductions of prepaid property taxes. After Christmas, long lines of people rushing to prepay their 2018 property taxes before year-end gathered at local government office.

Then on Dec. 27, the Internal Revenue Service warned that not all prepayments of 2018 property taxes would be deductible on 2017 returns. The agency said that to qualify for a write-off, the tax liability actually had to have been known at the time.

Right away, some tax specialists strongly agreed with the IRS but others strongly disagreed. The IRS and its supporters argued that those who prepaid all their 2018 property taxes can only deduct the portion that was known or determined at the time. In many cases, that means only for a few months of the year or not at all.

The IRS’s opponents argued for higher deductions of reasonable estimates. They based this argument on prior tax rulings and regulations that they think apply to this issue.

Now, three months later, little progress has been made.

Leading the opposition against the IRS’s position is Lawrence Axelrod, an attorney at Ivins, Phillips & Barker.

“The IRS position is misguided because it doesn’t take into account Treasury’s own regulations,” he said.

These regulations allow taxpayers to deduct amounts paid that will be due within 12 months. The IRS and its supporters disagree. They cite court decisions which say that to be deductible, taxes must have been imposed and the amount must be known.

Stephen Baxley, who heads tax planning for Bessemer Trust, a prominent multifamily office, agrees with Mr. Axelrod.

“If the amount is a reasonable estimate made in good faith, it’s deductible,” he says. The firm is responsible for preparing nearly 1,000 individual returns.

Other tax preparers agree with the IRS.

Brian Lovett, a certified public accountant with WithumSmith+Brown in New Jersey, where property taxes tend to be high, says his firm is following the IRS’s guidance: “We think the amount due must be determined for a prepayment to be deductible.”

The correct answer matters.

More than 80% of property-tax revenue is collected by local governments with a fiscal year other than Dec. 31, according to the latest data compiled by the Lincoln Institute of Land Policy. Frequently, the fiscal year ends on June 30.

As a result, total property tax bills for 2018 weren’t determined by year-end in many areas of the country. Many could reasonably be estimated, however.

For example, say John lives in a county with a fiscal year ending June 30. By the end of 2017, he knew he would owe $6,500 in property tax due by June 30, 2018. He could likely assume that his bill for the second half of 2018 would be about the same. So in late December, he prepaid $13,000 for 2018 to his county.

According to the IRS’s position, John can only deduct a prepayment of $6,500—because the amount due for the second half of the year hadn’t been set.

But if Jane lives elsewhere and knew she would actually owe $13,000 in property tax for 2018, she can deduct a prepayment of that amount on her 2017 return.

Some advisers allow both approaches. David Lifson, a CPA with Crowe Horwath who has many high-earning clients, says he recommends that clients deduct prepayments of known amounts. But he will allow a deduction of an estimate, “if I feel the client understands the risk that the IRS will disagree.”

The debate is ongoing. In March, Democrats on the Ways & Means Committee wrote acting IRS Commissioner David Kautter to protest the IRS’s interpretation of the law.

The good news for taxpayers who want to deduct prepayments of estimates is that neither Mr. Lifson nor Mr. Baxley thinks these write-offs need to be disclosed on IRS Form 8275. On it, taxpayers are supposed to disclose risky positions to avoid certain penalties. Supporters of the IRS’s position think the form should be filed, however.

Some taxpayers are also pushing preparers to take the deduction because the audit risk is low, given constraints on IRS resources.

Emily Matthews, a CPA with Edelstein & Co. in Boston, says she explains the IRS’s position to clients. But she says, “I think we’ll see a lot of people who prepaid estimated taxes opt to deduct them.”

By  | Apr 4, 2018

Posted by Sigrid Cottrell
Sigrid's Butte Blog

Crested Butte, the Best Ski Town in North American...
February 18, 2014

...The 15-seed mountain in Southern Colorado that beat everyone else

[The people of Crested Butte are taking to the streets to get the vote out. PHOTO: Crested Butte]
The people of Crested Butte are taking to the streets to get the vote out.
PHOTO: Crested Butte
The day after taking the second annual Ski Town Throwdown presented by Liftopia championship,
Crested Butte and its passionate denizens went after another win—the world record for the most
Santas skiing at one time. Santa suits sold for $25 a piece (and that included five drink tickets) and
hundreds of jolly red and bearded skiers stormed the mountain. That’s one of many reasons why
people voted Crested Butte the best ski town in North America. “We’re definitely a different breed
here in Crested Butte,” says Gabe Martin, 33, who owns the ski shopColorado Freeskier. “We’re so
far off the beaten path and we love that.”
Crested Butte was rated as a 15-seed in the Rocky Mountain West region, but the mountain beat
the oddsin the 64-town/ski area field, overcoming Powder Mountain/Snowbasin, Aspen, Big Sky,
Sun Valley, Stevens Pass, and the tournament runner-up, Eaglecrest, Alaska, by a record final
score of 17,156 votes to 17,063. CB is known for steep terrain and for hosting one of the longest
running big mountain competitions in the country (Freeskiing Extremes, a FWQ 4-star event), but
it’s also the kind of place where fundraisers are thrown for your neighbor’s dog who needs
surgery—and the entire town comes out to show support, says Martin. It’s a town of referrals,
where your friend knows another person who can help you with that thing. It’s famous for the
burritos and tamales at Teocalli Temale—a cheap, quick, delicious meal to power up on
powder days (except you’ll have to wait until noon, because the people who make your burritos
will be skiing fresh pow all morning). Crested Butte is a town where you can move in without
knowing a soul, and four years later, become the mayor. That’s what happened to Mayor Aaron
Huckstep. “Crested Butte is a unique place. The locals take a lot of pride in that,” says Huckstep.
“That really is the glue that keeps everybody together.”
The day after winning the Ski Town Throwdown, Crested Butte showed up to the mountain (and the bar) as Santa Claus en masse. PHOTO: Kochevar's
[The day after winning the Ski Town Throwdown, Crested Butte showed up to the mountain
(and the bar) as Santa Claus en masse. PHOTO: Kochevar's]
The day after winning the Ski Town Throwdown, Crested Butte showed up to the
mountain(and the bar) as Santa Claus en masse.
PHOTO: Kochevar’s
Every time Crested Butte was up for another round of Ski Town Throwdown voting, there’d be a
party at the oldest saloon in town, Kochevar’s, another slice of Crested Butte goodness recently
renovated by owner Jason Vernon. Amid the wall-hanging taxidermy, porcelain dolls, and other old
artifacts the saloon has collected since it first opened in 1886, Crested Butte skiers and riders cast
their votes. Billboards across Colorado got the vote out. And last Friday, voters were biting their
nails until 6 p.m. Mountain Standard Time, when the polls closed. Crested Butte beat Eaglecrest by
a narrow 93 votes out of more than 34,000 total votes cast in the finals.
“Everyone gets pumped up,” says Martin, who hopped on a bus on Saturday night and gave a
shout out to CB’s win, spurring cheers from the rest of the riders. “We’re definitely going to be living
off this high for the next year.”
Details, Details:
Vertical: 2,775
Average Annual Snowfall: 300 inches
Total inbounds acreage: 1,547
Ticket price: $98
Don’t Miss: Teocallii Bowl, a short hike in and a short hike out, but your chances of finding a stash
are pretty good.

by: JULIE BROWN published: DECEMBER 17, 2013
Posted by Sigrid Cottrell

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