Attorney General's Letter to IRS: Individuals Who Prepaid 2018 Property Taxes in 2017 Entitled to SALT Deduction

TRENTON – Attorney General Gurbir S. Grewal today sent a letter to the Internal Revenue Service (IRS) advising that, under his interpretation of state law, New Jerseyans who prepaid their 2018 local property taxes in 2017 are entitled to the 2017 state and local tax (SALT) deduction.

“This is a matter of fundamental fairness,” Grewal states in the letter, which addresses public confusion resulting from an IRS Advisory on the issue. “If corporations can deduct employee bonuses in 2017 that will not be paid until 2018, individuals must be able to deduct property tax payments they made in 2017.”

The Tax Cuts and Jobs Act of 2017 adopted an unprecedented change to the federal tax code. Previously, taxpayers could deduct from their federal tax liability all money paid for state and local income, property and sales taxes. Under the new code, however, the same taxpayers can only claim a deduction of up to $10,000 for those taxes.

Attorney General Grewal’s letter notes that many New Jersey residents, in an attempt to “mitigate the impact of the new law” rushed to prepay their state and local taxes in 2017. Indeed, Grewal continues, “thousands of our residents … assumed that local property tax payments made in 2017 would receive 2017 federal tax treatment.”

However, the IRS issued an Advisory on December 27, 2017 that was ambiguous and left the public unclear on the issue. The IRS Advisory said that only some 2018 real property taxes prepaid in 2017 would qualify for 2017 treatment.

According to the Advisory, whether or not an individual would be allowed a deduction for prepayment depends “on whether … the real property taxes are assessed prior to 2018.” That question, the Advisory added, is an issue of “state or local law.”

In his letter to the IRS today, Attorney General Grewal says that New Jersey law “welcomes prepayments – and if residents start satisfying their tax obligations during the prior year, their payments are ‘credited’ at that time. So as a matter of state law, a 2018 local property tax payment made in 2017 is entitled to treatment under 2017 rules.”

Even if New Jersey statutes did not resolve the issue, Grewal notes, an Executive Order issued in 2017 reaffirmed the State’s intent to permit prepayment of 2018 property taxes in calendar year 2017, and “to credit those payments as received in calendar year 2017 if the payment is postmarked on or before December 31, 2017.”

“All relevant sources of New Jersey law thus point to the same result – that New Jersey residents who prepaid their 2018 local property taxes in 2017 are entitled to the SALT deduction that applied in 2017,” the letter asserts. “State statutes, executive orders and agency notices are clear that residents may satisfy property tax assessments in advance and payments must be credited at that time.”

Attorney General Grewal’s letter closes by expressing his readiness to discuss the matter further, and expressing his hope the IRS “can confirm that New Jersey taxpayers who paid 2018 property taxes on or before December 31, 2017 will be eligible for the deductions available in 2017.”

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