Rules for NJ and Federal Property Tax Deductions Vary Widely

by Kathleen Hoffelder, Content Editor, and Rachael Bell, Content & Communications Director, NJCPA  – January 11, 2018
Rules for NJ and Federal Property Tax Deductions Vary Widely

Updated January 12, 2017

New Jersey taxpayers who prepaid one or two quarters of their 2018 property tax assessments at the end of 2017 need to be aware that the amount they can deduct on their federal tax return is not the same as the amount they can deduct on their state tax return. On a federal level, property taxes paid in 2017 plus any prepayments made by December 31, 2017, for assessed 2018 property taxes are deductible in the 2017 tax year. However, according to the New Jersey Division of Taxation, those prepayments made for 2018 assessments can only be deducted on 2018 New Jersey tax returns. Simply put, in New Jersey the property tax year must match the income tax year when attempting to take deductions.
According to the New Jersey Division of Taxation, "residents can claim a deduction or credit on their New Jersey income tax returns for the property taxes they have paid.  However, they can take the deduction or credit only in the year in which the property taxes were due. Taxpayers cannot take deductions or credits for 2018 property tax pre-payments on their 2017 New Jersey Income Tax returns (NJ-1040). They must wait until they file their 2018 returns."

The difference between the state and federal deductions can vary widely, particularly when looking at residents who pay real estate taxes higher than the $10,000 state and local tax deduction cap outlined in the Tax Cuts and Jobs Act in December. The passage of the Act prompted the prepayment frenzy since it caps the amount of state and local taxes that can be deducted on federal income tax returns at $10,000 starting in 2018.

Consider the following scenarios as they relate to New Jersey residents:  

Example A

Homeowner A’s property taxes are $8,000 per year. He paid all of his 2017 property taxes ($8,000) during 2017 and also prepaid the first two quarters of his assessed 2018 property taxes ($4,000) on December 27, 2017.

  • On his 2017 federal tax return, he can claim a property tax deduction of $12,000 – the total of all property tax payments assessed and paid in 2017.
  • On his 2017 New Jersey tax return, he can only claim a property tax deduction of $8,000 – the total of all property taxes assessed in 2017. The $4,000 prepayment of his 2018 property taxes will be deductible on his 2018 New Jersey tax return, even though the payment was made in 2017.

Example B

Homeowner B’s property taxes are $12,000 per year. She paid all of her 2017 property taxes ($12,000) during 2017 and also prepaid the first two quarters of her assessed 2018 property taxes ($6,000) on December 27, 2017.

  • On her 2017 federal tax return, she can claim a property tax deduction of $18,000 – the total of all property tax payments assessed and paid in 2017.
  • On her 2017 New Jersey tax return, she can only claim a property tax deduction of $10,000 – the total of all property taxes assessed in 2017, with a cap of $10,000 per year. The $6,000 prepayment of her 2018 property taxes will be deductible on her 2018 New Jersey tax return, even though the payment was made in 2017.

For New Jersey, the new federal cap on property tax deductions weighs harshly compared to other states as it has the highest property taxes in the nation. Governor Christie signed an executive order in December requiring state municipalities to accept property tax prepayments for at least the first and second quarters of 2018. However, only payments for the actual assessed amounts can be deducted, not tax estimates.  

“New Jerseyans need to take advantage of tax opportunities that can lighten their load. As a state with such high property taxes, it’s imperative that residents consider their individual financial situation and obtain guidance from CPAs,” said Ralph Albert Thomas, CEO and executive director, New Jersey Society of CPAs (NJCPA).

NJCPA members recommend that taxpayers who have opted to prepay their taxes and take the deductions should retain their canceled checks as proof of payment for 2017 and 2018 tax returns. They caution that extra scrutiny could be placed on those returns due to the prepayment allowances.