Hanover
The IRS issued an advisory on Wednesday that prepayments on local and state property taxes could only be deducted on 2017 federal income tax filings “under certain circumstances,” throwing into question whether the practice will remain effective for those hoping to stave off higher payments in the new year, when the legislation takes effect.
Taxpayers across the country have turned to prepaying their bills in the hopes of avoiding a $10,000 cap on local and state deductions.
The conference report in Congress said the prepayment maneuver would not be allowed for state or local income taxes, but was silent on the issue of property taxes. However, the IRS advisory this week made clear that prepayments may only be deducted if the property tax bills are sent out prior to 2018.
The owner of a $1 million home in Hanover pays more than $21,000 annually in property taxes, so the cap on the tax deduction could cost them thousands of dollars a year.
In Hanover, about 124 households have prepaid $1.4 million toward future tax bills in an attempt to capitalize on the full deduction before it is capped, Town Clerk Betsy McClain said on Thursday morning. That’s up from roughly $12,000 collected last December, she said.
Norwich also has seen a steady stream of residents hoping to pay their February tax installment before the new year, town Finance Director Roberta Robinson said.
“Of course, we’re continuing to get a lot of questions,” McClain said of the IRS guidance. “That certainly has come up and we’re urging all of our citizens to consult with their tax adviser.”
Norwich collected $924,000 between Wednesday morning and Thursday afternoon, Robinson said, adding some people also are insisting on prepaying future tax bills, even though, as it turns out, it is unlikely to carry any federal tax benefit. On Wednesday, residents paid $47,000 in taxes that have yet to be billed, she said.
Lebanon property owners also are allowed to prepay up to two years of future tax bills, after the City Council voted last week to begin accepting payments.
Since then, the city has collected $420,000 from 39 households, Deputy Finance Director Viki Lee said on Thursday afternoon. Almost half of those payments came in on Thursday alone, she said.
However, Hartford hasn’t seen the same response from taxpayers, said Town Manager Leo Pullar, who estimated the town had collected about $33,000 in prepayments as of Thursday morning. “We have had a couple of residents that have tried to pay ahead of the August 2018 tax bill,” he said, adding the town is accepting those payments.
While area towns report more taxpayers are turning out to pay future bills, that response — particularly in New Hampshire — runs counter to what many accountants are advising.
“We were telling our clients all along that the old rule has always been this: you need to have the bill there in order to pay it,” said Kenneth Goodrow, an accountant with the Lebanon-based firm Tyler, Simms & St. Sauveur.
Tax payments — and the resulting deductions — are likely to vary between towns and states depending on when bills are issued, Goodrow said.
In New Hampshire, property tax installments are traditionally due before the end of the calendar year. And since bills for the new year haven’t been issued in many Granite State towns, the IRS likely won’t accept deductions on prepayments to future bills, Goodrow said.
Vermont residents could fare a bit better, though. Because their tax installments often extend into February, Goodrow said, people can pay off that portion of the overall bill now and deduct it for 2017.
“We’ve been telling clients that only if you have a bill in hand are you safe to deduct it,” Goodrow said.
Hanover accountant Donald Silver agreed with that assessment, saying prepayments will only benefit those who have received a bill that extends into the new year.
“You’ve got to have a bill to pay it,” he said. “I live in New Hampshire and all my real estate taxes have been paid. I don’t have a bill to pay for this moment in 2018.”
Although the IRS advisory partially cleared up questions surrounding tax deductions, the recent confusion is understandable, said Patricia Morse, a Lebanon-based accountant who advises clients in both New Hampshire and Vermont.
Since the tax bill was passed, she’s sent out several emails to customers, first suggesting they prepay their taxes, then to hold off.
“There’s been like three or four transitions of thinking on this,” Morse said on Thursday. “My answer three days ago was different than today.”
The prepaid taxes will, of course, still apply to next year’s property taxes, even if they don’t carry any federal tax benefit. But some people are asking for their money to be refunded.
Hanover is accepting written requests for refunds, said McClain, who added that people will need to provide a Social Security number to receive anything over $600.
Norwich and Lebanon aren’t issuing refunds, though, partially because of legal questions surrounding whether the practice is allowed. Lee, Lebanon’s deputy finance director, said the city is awaiting an opinion about refunds from its legal counsel.
In the meantime, some town clerks are referring to an opinion issued on Wednesday by Bernard Campbell, an attorney who represents the New Hampshire City & Town Clerks Association.
“ … It is my feeling that if a payment is accepted, it cannot be ‘returned’ (ie. the owner ‘changes their mind’),” he wrote in a letter distributed to local finance officials. “The municipality is not a ‘bank’ or an investment company where someone can simply ‘park’ money.”
Tim Camerato can be reached at tcamerato@vnews.com or 603-727-3223.