Cranford residents, others stymied by IRS on property taxes

CRANFORD, NJ — More than 900 Cranford residents joined an end-of-the-year scramble to prepay their 2018 property taxes. The idea is they’d get one more year out of the deduction on their federal income returns before the new tax reform legislation signed in December limits their exemption to $10,000.

Cranford saw nearly a $7 million deluge but now homeowners are learning they may get only half of what they hoped to from the maneuver.
“We thought we would be able to deduct all of our income taxes for the whole 2018 year, but then we learned that we can’t, so we only prepaid the first two installments,” Cranford resident Amy McHugh told LocalSource.

While much of the country cheered when President Donald Trump signed the new tax legislation, New Jerseyans jeered because of the state’s high property taxes.

In addition to New Jersey, New York and California also were hit hard, according to Mark Pfeiffer, assistant director of Rutgers University Bloustein Local Government Research Center.

In 2016, average property taxes in New Jersey were just under $8,300, and Union County had the third highest average in the state with $10,628, Pfeiffer told LocalSource in a Feb. 16 phone interview. “A lot of the folks affected by this are people that are above average earners with significantly higher property taxes,” Pfeiffer added.

In response, former Gov. Chris Christie signed an executive order stating that all municipal tax collectors must accept prepayments for all four quarterly tax installments, which are due the first of February, May, August and November.

However, a subsequent Internal Revenue Service ruling contradicted Christie’s action, declaring that 2018 prepayments are deductible only if a homeowner has already received a bill from their local government. Most municipal governments issue their tax bills in June or July for the next 12 months, after they have passed their budgets and tax increases — or decreases — have been determined. This means the only property tax payments deductible for federal income tax purposes are those paid through the first six months of this year, or the February and May installments.

In November, the Cranford Township Committee passed a resolution opposing the elimination of the state and local tax deduction, aka SALT.
“By some estimates, 40 percent of Cranford residents are deducting their taxes,” Commissioner Patrick Giblin said at the committee’s Nov. 28 meeting. “We’re one of the highest taxed states in the country, if not the highest. Taking that deduction away, as well as a high state tax, will have a very negative impact on our residents.”

The federal change matched New Jersey state law, which also limits property tax deductions to $10,000.
Explaining the IRS ruling, John E. McWeeney Jr., president of New Jersey Bankers Association, told LocalSource on Feb. 19, that “people can’t pay August and November if the municipal budget in the spring has not been finalized.”

Additionally, Pfeiffer noted that Christie’s order presumed the IRS would accept the payments as valid.
“But the governor did not have the authority to do that,” he said. “I think uncertainty remains for people that prepaid their third- and fourth-quarter taxes, because those bills have not been issued out.”

Gov. Phil Murphy also has floated an idea to appease high property tax payers by allowing them to designate their payments as a “charitable donation,” allowing them to keep their deductions. It’s a suggestion that has been almost universally scoffed at by tax experts.

U.S. Reps. Leonard Lance and Josh Gottheimer, a Republican and Democrat respectively, both voted against the tax reform legislation in Congress, along with the entire New Jersey congressional delegation. They met Feb. 15 with acting IRS Commissioner David J. Kautter about 2018 property tax prepayment, seeking to create a legislative solution or another IRS ruling to fix the problem, according to a Feb. 15 press release.

“I don’t think they will be successful, regrettably, because in part, the federal budget depends on the revenue in taxes for this,” Pfeiffer said. “I see this playing out in the courts where, if the courts proceed and rule on this through litigation, it will determine an outcome.”