New Jerseyans need to prepay real estate, local taxes before year’s end, say accountants

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New tax reform laws could spur New Jerseyans – retirees in particular – to sell their homes and move into rental spaces, according to several local accountants.That’s because a sweeping overhaul of the tax code currently being ironed out by House and Senate Republicans in the U.S. Congress would cap the deduction for property taxes at $10,000 and preserve the mortgage interest deduction only for existing mortgages and new purchases with mortgages of $500,000 or less.

That would be bad news for state residents, who already pay some of the highest property taxes in the country, and could exacerbate the population flight out of New Jersey. It could also prompt residents – particularly retired people who no longer have children in the state’s school system – to sell their homes in favor of rental properties.

In 2016, the Garden State saw 63 percent more people leaving than moving in, according to a United Van Lines study, making it the top state in net outflow of population.

Stuart Berger, a partner at Clifton-based Sax LLP and head of the firm’s real estate practice, said capping the deduction on property taxes may have a minimal effect on residents in other parts of the country, but will negatively impact New Jerseyans because of high property taxes and home ownership costs.

“I am concerned that if that real estate tax cap goes higher, it is going to further accelerate the moves out of New Jersey,” Berger told NJBIZ. “It might push some of the seniors who have lived in a community for years to sell their homes and move into a new rental property from that standpoint.”

Berger also said the new cap could discourage young people from seeking to purchase their first homes in the state.

“The flight to home ownership could be reduced,” he said. “In the past the young people who were stretching themselves out to buy a home always considered that they got a tax write off on mortgage interest. This could be a factor in whether they will consider home ownership.”

The main message from accountants in the state, however, is to pay state and local taxes for this year by Dec. 31, and make as many charitable donations as possible before the end of the year. Additionally, residents should check with their accountants to see whether they qualify for the alternative minimum tax bracket.

Under the proposed Senate tax reform, dubbed “The Tax Cuts and Jobs Act,” the threshold for the alternative minimum tax (AMT) would be increased. The AMT is an alternative set of tax rules designed to ensure that wealthy people do not take large enough tax deductions to eliminate their entire tax bill.

State residents should also pay their real estate, state and local taxes before the end of the year in order to be able to use them as deductions for their federal taxes.

“Our high net worth clients should find out if they qualify for AMT, and they should they prepay SALT and real estate taxes before the end of the year,” said Berger. “That’s not even up for debate.”

Jim Lawrence, a partner and CPA at Traphagen Financial Group in Oradell, agreed that residents should pay state and local taxes before the end of the year in order to get the current deductions, but said his firm is recommending to clients that they pay their estimated state taxes for the first quarter of 2018.

By doing so, residents would get a voucher for the first quarter before the new tax law kicks in, thereby allowing them to get a deduction on those taxes next year under 2017 tax laws.

“The 2018 voucher is a new concept,” said Lawrence. “So the worst-case scenario is that no legislation goes through, but you’d still getting that deduction for first quarter of 2018. I don’t think there’s anything lost by doing it. We’re talking about $2,000 to $4,000 [in tax returns] that they might not ever see again,” he said.

TFG is also telling its clients to make any charitable donations before the end of the year, since the standard tax deduction for charitable giving could disappear in 2018. The tax reform packages in both the Senate and House would double the standard $24,000 charitable tax deduction, and fewer taxpayers would itemize their charitable giving, which is the only way to take advantage of the deduction for charitable contributions.

“If you don’t itemize the charities that you’re going to pay next year, you’re probably not going to get a tax benefit,” said Lawrence.  “So unless you have other expenses that get you past that $24,000, you should file them now.”

Medical expenses should also be prepaid before the end of the year due to uncertainty over whether medical expenses can be deducted. The Senate tax bill would preserve the deduction for medical expenses and temporarily lower the threshold for claiming it to 7.5 percent of adjusted gross income from the current 10 percent.

The House version passed in mid-November, however, eliminated the medical expense deduction, which is used by roughly 6 percent of tax filers across the country who have expensive health care needs. This would significantly impact New Jersey residents, who already face some of the highest health care costs in the country.

Anthony Nitti, a partner at Princeton-based accounting firm WithumSmith Brown, also agreed 2017 state and local taxes should be paid before the end of the year, but he cautioned that prepaying 2018 first quarter taxes should be considered on a case-by-case basis.

“We’d love to be able to prepay not only fourth quarter estimated 2017 state income tax, but also 2018 taxes before year end,” he said. “The problem, however, is that in order to prepay the next year’s liability, it needs to be based on a good faith estimate of the 2018 liability, and the state needs to accept the payment and credit it to 2018 even though that year hasn’t even begun yet. This will likely vary from state to state.”