Tax Plan: Can You Deduct Prepaid Property Taxes?
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Your Money Briefing. Money and market stories from The Wall Street Journal. I'm J.R. Whalen in New York. Some experts say taxpayers can deduct their 2018 property taxes from this year's returns, while others say, hold on, you've got it all wrong. We'll sort it out in a moment. First, these money items you need to know. The Wall Street Journal properties team reports a growing percentage of apartment renters aren't interested in buying a home as affordability challenges take a bigger toll than
What is the prepaid property tax controversy introduced at the top of the episode?
on American aspirations of homeownership. In all, 20 percent of renters say they have no interest in owning a home. That's up from 17 percent in August and 13 percent in 2016. That's the word from a semiannual survey of renters by mortgage company Freddie Mac in January. And two-thirds of renters who plan to continue renting say they're doing so for financial reasons, up from 59 percent two years ago. And the journal's real-time economics desk says that new research says American women should keep working after their husbands retire. If they want to catch up in terms of Social Security benefits, married couples often choose to stop working at the same time, taking advantage of the opportunity to travel or otherwise spend time together.
But most married women are younger than their husbands, and some have delayed or interrupted careers due to child rearing. Social Security retirement benefits depend on how much someone earns over the course of their career, calculated based on their 35 highest earning years. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. There's a big debate going on surrounding the upcoming tax filing deadline.
What housing and Social Security headlines set the context before the tax discussion?
No, not whether you should file for an extension. It's whether you can deduct prepaid property taxes. And Wall Street Journal tax reporter Laura Saunders is here to help us sort this out. So, Laura, the question was triggered upon passage of the new tax law and the caps it placed on the deductibility of state and local taxes. And that's why we saw taxpayers rushing to pay their 2018 property taxes in advance.
Yes, that's exactly right. Most people, in fact nobody, under the new law will be able to deduct more than $10,000 of state and local income, property, and sales taxes. So they figured that if they could prepay 2018 property taxes, that that would help them on their 2017 returns. And so that's why you saw all these long lines at county tax offices right before the end of December. But then the IRS jumped in and they said, hold off. Maybe those prepaid property taxes aren't deductible. And then we got this big debate, the hottest debate I've ever seen in taxes over something so important, so close to deadline, and it's not resolved at all.
You had in your story, you had as many tax experts siding with the IRS as those opposing it. And that's very unique, isn't it?
I think so. And these are all highly respected people. Usually, you know, there's one position that's a strong position and the other position is a weak position. But there's a pretty strong position in both cases this time. Now, what the IRS basically said, and it's very almost metaphysical issues, but what it translates into is that You can't deduct those property taxes unless you really knew what they were going to be to the dollar. You know, you didn't have to have a bill in your hand, but you couldn't just estimate. You couldn't have a reasonable estimate. And a lot of property tax authorities—cities, towns, counties, educational boards and things— have a June 30th deadline. So many people knew what their taxes would be through June 30th, and they could pretty well guess what they were going to be from June 30th to the end of the year.
But under the IRS's interpretation of the law, you could only deduct those ones that you already knew what they were.
But for taxpayers who prepaid, many that you spoke with feel it wasn't a total waste of their time to do that because even if they take the deduction, a lot of tax experts say the audit risk is fairly low.
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