Rushing to pay taxes? New law spurs confused pre-payment push

[December 29, 2017]  By Daniel Bases and Katanga Johnson

NEW ROCHELLE, N.Y./FAIRFAX COUNTY, Va. (Reuters) - Americans scrambling to prepay 2018 state and local taxes before year end may not get the federal deductions they hoped for, but that did not slow the rush on Thursday in some of the nation's highest-taxed municipalities.

Municipal coffers are fattening up as taxpayers pay now with the hopes of avoiding a new $10,000 limit on deductions for state and local income and property taxes from their federal bill in April, part of a sweeping law signed by U.S. President Donald Trump last week.

The rush prompted the U.S. Internal Revenue Service to caution homeowners late on Wednesday that pre-payments on property taxes may not be deductible. A full deduction depends on when the property taxes were assessed.

That detail may have caught many off guard.

"That's news to me," said Mary Rappaport, a resident of Fairfax County, Virginia who waited with two dozen people to prepay at eight fully staffed windows at the county's Department of Tax Administration.

After consulting with a DTA representative, Rappaport still paid her 2018 property taxes in advance after learning about the IRS note.

"It will reduce my mortgage payments but it's not the kind of advantage I was hoping for. It made me feel defeated," she said.

Critics of the federal tax bill see capping the deduction for state and local income and property taxes, known as SALT, as punitive to high-tax states like New York, New Jersey and California.

"Its wildly confusing and that's the reason why you shouldn't rush through a tax bill so late in the year without giving people the chance to understand it," said Steve Hickson, a South Orange, New Jersey, resident who prepaid his property tax bill online.

"You're delaying the pain of the new tax bill ... that's why you're seeing people do a mad dash to your local town hall," he said.

According to an analysis of IRS data by the Tax Foundation, a pro-business Washington think tank, New York ranks first when state and local tax deductions are measured as a share of adjusted gross income, at 9.1 percent. New Jersey is second at 8.7 percent, followed by Connecticut and California.

At the opposite end is Alaska with 1.5 percent, and North Dakota, South Dakota and Wyoming at 1.6 percent.

FAT ACCOUNTS

New Rochelle, New York, a city of roughly 80,000 residents just north of New York City, is seeing an unprecedented swell in its cash pile thanks to the rush.

Grailing and Joyce (L) Carter review their property taxes at the Fairfax County Department of Tax Administration Office in Fairfax, Virginia, U.S., December 28, 2017. REUTERS/Katanga Johnson

"Our city tax bill is due for payment at the end of January. Typically we have maybe a couple hundred thousand dollars on hand at this point. So far, from the time this law was passed in Congress we've collected over $15 million," Charles Strome, New Rochelle's city manager said during an interview in his office.

"This is unprecedented. I have to go now and pay my own taxes early," he said, noting that the city also collects on behalf of the public school district.

Strome said the new tax law could lower home values in the city by 5 percent to 10 percent.

But that will not necessarily deter construction. New Rochelle has recently kicked off a multi-billion dollar downtown redevelopment, and the high proportion of rental units in the new buildings means changes to SALT deductions will unlikely deter new residents from the city, he said.

Some New Rochelle taxpayers unsure of the rules came looking for answers before writing checks, including attorney Dan Feldman.

City clerks answered Feldman's questions and moved residents through the payment line even as they scrambled to find replacement ink to print tax bill receipts.

"Assuming your real estate taxes are more than $10,000, why wouldn't you do this to take advantage of something that is going to go away, if you can afford the early payment," Feldman said.

New York Governor Andrew Cuomo stepped up his attacks on the new tax legislation on Thursday, saying it unfairly targets high tax-states and may be unconstitutional.

"Until I get to my accountant, I won't know the specifics of the bill. Even the senators that voted on the bill don't know what's in the bill," Ed Finnegan, a publisher who lives in Bay Ridge, Brooklyn said while waiting to prepay taxes in Manhattan.

(Additional reporting by Katanga Johnson in Fairfax, Virginia; April Joyner in New York; Sinead Carew in New Jersey; Editing by Meredith Mazzilli)

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