Tax law creates confusion

Tax law creates confusion and uproar in city halls across America

Just a week after it was signed, the tax overhaul is already triggering a swift backlash from puzzled taxpayers and officials.

By AARON LORENZO

Mass confusion is erupting in town halls across the country thanks to the new tax law, as tens of thousands of property owners scramble to pay next year’s taxes ahead of schedule — while the governors of their states and the IRS give conflicting signals about whether that’s even allowed.

In the Albany suburb of Bethlehem, N.Y., more than 100 people waited in a gym to pay their property tax bills — some of them for over an hour — on Thursday before a new federal $10,000 cap on state and local deductions goes into effect Jan. 1. Municipalities on Long Island were preparing to open over the weekend to give taxpayers more time to pay. But the IRS issued an edict Wednesday night saying the early payments could only be deducted on 2017 taxes if they had already been assessed. That threw residents and local government officials into a new round of confusion as everyone scrambled to determine which payments would qualify.

The uncertainty this week could be the first of many misunderstandings to come as new tax rules take effect starting New Year’s Day. The tax law that President Donald Trump signed Dec. 22, which Congress rushed to pass before the end of the year, is explicit in some of its language, but vague in other areas. It explicitly forbade prepayments of state and local income taxes but was silent on prepayments for state and local property taxes.

“What the federal government did and the timing of their actions was, in our view, cruel and unusual,” said Steve Acquario, executive director of the New York State Association of Counties. “They passed this tax bill at a time of year when government is very much in transition to the next fiscal year. There was great confusion this week.”

Jack Peterson, a lobbyist at the National Association of Counties, said he’s fielded questions from county officials nationwide this week about what the full gamut of federal tax changes could mean for them, with the preponderance of prepayment inquiries coming from officials in New York, New Jersey, Pennsylvania and Maryland.

“Any changes certainly take time and effort to properly implement and fairly implement,” he said.

The state and local tax deduction chaos erupted just days after the bill was signed into law. The new rules allow taxpayers to deduct their property taxes and either their state and local income or sales taxes up to $10,000 beginning Jan. 1, a change from the past in which all those state and local taxes were deductible without limit. So both New Jersey Gov. Chris Christie and New York Gov. Andrew Cuomo — whose states have high property taxes that well exceed that limit for many residents — issued orders encouraging people to prepay and deduct their 2018 taxes this year. Those orders just added to the confusion.

Lydia Leszczynski, tax collector from the Essex County town of Montclair, which has high property taxes, said residents prepaying them had only been thrown into more uncertainty by the IRS advisory as well as some language in Christie’s executive order regarding when payments have to be postmarked.

“If you want to make a prepayment, we’ll accept a prepayment. How it works out for them when they file taxes, I don’t have on advice on that,” Leszczynski said. “They have a lot of questions. It’s not just do you accept 2018 — do you accept the whole year. It’s that ‘what does it mean, can we do this?’ We’re not tax professionals.”

In addition to postmark uncertainty, there remained other payment date doubts based on the when checks were signed or received, or when the funds cleared. There is also ambiguity over what constitutes an assessment: an actual bill from a tax office or its notice of a property assessment for the year ahead?

“It’s a scramble,” said Cuomo, a Democrat, during an interview on MSNBC Thursday. “This is what happens when Washington passes a bill in the dark of night and doesn’t vet it with the public.”

New Jersey Senate President Stephen Sweeney said the new federal tax law will force New Jersey, a high-tax state, to re-examine school funding and other services.

People line up to pay their real estate taxes. | AP Photo
People line-up at the Town of Hempstead tax receiver's office on Tuesday to pay their real taxes before the end of the year, hoping for one last chance to take advantage of a major tax deduction before it is wiped out in the new year. | Howard Schnapp/Newsday via AP

The latest advisory from the IRS, he said, only aggravates things further. Sweeney had called on Christie to let residents prepay their 2018 taxes before Jan. 1, and Christie on Wednesday signed an executive order to make sure local governments allow it.

“And they’re raining on our parade in Washington as we’re trying to ease the pain for a year,” Sweeney said.

Like Christie, Cuomo on Friday signed an executive order removing legal barriers for prepayment. Cuomo’s order specifically authorized municipalities to accept partial prepayments, which the subsequent IRS guidance said wouldn’t be deductible on 2017 federal income taxes.

Gerry Geist, executive director of the New York State Association of Towns, said the changes were “extremely daunting and confusing.”

“When the governor made his announcement — and I applaud the governor for just trying to help in this situation — but we all sort of believed you could just take what you paid last year as an estimate and make the payment,” he said. “But when the IRS made its pronouncement on Wednesday and said it has to be assessed, that changed everything. In Westchester, you don’t have the assessment.”

The IRS was clear in saying that taxpayers must make their prepayment this year for next year’s real property taxes that have already been billed. Those rules are consistent with prior IRS practice and case law on prepaid property taxes, said Nicole Kaeding, an economist for the Tax Foundation.

In some places, such as Iowa, taxpayers should be able to deduct their prepayments of 2017 property taxes because they’ve already received bills that are due early next year, Kaeding said.

But it’s not as clear elsewhere, including New York, New Jersey and the Washington, D.C., suburb of Fairfax County, Va., where property taxes are billed in February for due dates in July and December.

That hasn’t stopped more than 7,300 property owners from prepaying from Dec. 20 through Dec. 27 via walk-in and mail transactions as well as wire transfers, according to Dawn Nieters in the county’s public affairs office. Those prepaid collections totaled $50 million on personal property and real estate taxes.

Officials in Fairfax, for which real estate and personal property taxes accounted for about $3.2 billion of its general fund receipts for fiscal year 2018, have advised property owners in the county to consult their own tax advisers or call the IRS for more information.

“Fairfax County makes no representations about the deductibility of the advance tax payments for federal or state taxes,” its website said.

Refunds are available for those who’ve prepaid but won’t get a federal deduction, should they apply for it. The Fairfax tax office just set up an email address to field refund requests, said Nieters: refunds@fairfaxcounty.gov.