On April 20, 2018, New Jersey Governor Phil Murphy signed into law Assembly Bill 3382. The law, codified as N.J.S.A. section 54:4-68, is intended to allow individual taxpayers to retroactively deduct, on their 2017 federal income tax returns, some of their 2018 real estate property taxes (levied on their personal residences) that they paid during 2017. The law purports to accomplish this objective by requiring municipalities and other political subdivisions to accept these as lawful prepayments of tax paid in 2017.

Before passage of the law, New Jersey law only permitted municipalities to receive these tax prepayments if a municipal resolution or ordinance allowed it. Not all New Jersey municipalities had authorized such prepayment. Under the new law, taxpayers in every New Jersey municipality will be able to treat these prepayments as having been paid at the time they were actually paid even if the municipality has not yet issued its tax bills. The law also provides that the amount of the prepayment may be based on the taxes paid in the preceding year. The new law covers prepayments that were made on July 1, 2017, and thereafter. The new law also provides for refunds when the taxpayer has overpaid a property tax installment and states that, when the mortgagee and mortgagor both pay the same property tax installment, the second to pay is entitled to a refund.

Implications

The property tax prepayment law is part of an overall effort by New Jersey political leaders to protect New Jersey taxpayers from the perceived negative effects of the new federal $10,000 annual limit on individual state and local tax deductions enacted under the federal Tax Cuts and Jobs Act (TCJA) on December 22, 2017. Before the end of 2017 and in direct response to the TCJA provision, many New Jersey taxpayers prepaid some or all of their 2018 property taxes in 2017 under the assumption that they would be fully deductible for federal income tax purposes if paid in 2017. In response to uncertainty over the issue, the Internal Revenue Service (IRS) issued guidance stating that a prepayment is deductible for federal income tax purposes if the taxes were assessed and paid in the prior year. Because most municipalities in New Jersey assess a full year of property taxes starting with the third quarter of calendar year 2017, the IRS may permit the deduction, in 2017, of property tax prepayments for the first and second quarters of 2018. Prepayments in 2017, of third and fourth quarter 2018 taxes may, however, be disallowed by the IRS. It should be noted as well that prepaid taxes to municipalities utilizing a different assessment schedule could be treated differently. The property tax prepayment issue highlights the complex interplay between federal, state and municipal tax law. It remains to be seen if the IRS will respect the benefits provided by the New Jersey law or whether it will aggressively challenge taxpayers who attempt to take the benefit of these deductions for 2018 property taxes on their 2017 returns.

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