Assemblyman Seeks Fix to Expedite NJ Credit for Property-Tax Prepayments

John Reitmeyer | January 24, 2018 | Budget, Politics
Without a quick legislative repair, the thousands of residents who rushed to prepay their 2018 property taxes will have to wait until next year for state tax credit

Many New Jersey residents decided to prepay property tax bills late last year in response to a new federal law that for the first time ever capped a popular write-off for state and local taxes. By doing so, they hoped it will let them enjoy, at least for one more year, a major federal tax benefit.

But even as the federal government is allowing the prepayments to count as a credit on 2017 federal tax returns, New Jersey’s own tax laws treat those payments differently, complicating matters for residents who are now starting to do their taxes.

The New Jersey Society of Certified Public Accountants issued a notice earlier this month that warned of the discrepancy between how the state and federal governments are treating the property-tax prepayments, and now one of the state’s newest lawmakers is proposing legislation to try to reconcile that difference.

Assemblyman Roy Freiman (D-Somerset) is planning to introduce a measure early next week that would change state law be to allow residents who prepaid a portion of their 2018 property tax bills to get a credit on their 2017 state tax returns, just as they will on their federal returns.

Sizable tax increase

Freiman’s proposal is just the latest to emerge in response to the major tax-code overhaul that President Donald Trump and the Republican Congress enacted late last year. While some New Jersey residents may see modest tax benefits from lower income-tax rates and an increased standard deduction, many others are facing a sizable tax increase thanks to a new, $10,000 cap that was placed on the federal write-off for state and local taxes known as SALT.

In its notice, the CPA organization highlighted that while the $10,000 cap on state and local taxes is a new provision of the federal tax code, New Jersey has capped how much property taxes can be deducted from state income taxes going back to 1996. So, even if the state allowed for the prepayments to count on 2017 state tax returns, they would be capped at $10,000 for state purposes.

In addition to seeking to clear up the disagreement between the federal and state rules when it comes to the treatment of the property-tax prepayments, Freiman’s bill would also double for one year the state’s own $10,000 limit on how much property taxes can be deducted from state income taxes.

“We’re reacting to an environment coming out of Washington that’s not favorable to New Jersey,” Freiman said yesterday in an interview with NJ Spotlight.

Murphy supports ‘workaround’

In response to the federal tax changes, Gov. Phil Murphy, a Democrat, has threatened to join with governors from other high-tax states in a lawsuit against the federal government. He’s also embraced a “workaround” proposal put forward by two Democratic congressmen from New Jersey that would encourage municipalities to create special charitable funds that could be used to help lower property-tax bills to help ease the loss of the full federal write-off.

Many New Jersey residents decided to prepay some of their 2018 property-tax bills before the end of 2017. Since property taxes average more than $8,500 alone in New Jersey, that enabled them to benefit from the unlimited SALT write off-one last time when they file their 2017 tax returns.

That’s because, under IRS rules, the prepayments can be deducted on 2017 returns if the bills were assessed in 2017. In New Jersey, most towns had already assessed and made bills available for property taxes covering the first two quarters of 2018 by the time the federal tax changes were passed in late December.

Under current state tax law, the New Jersey income tax write-off for property taxes is allowed only in the year that the property taxes are due. That means any prepayments that New Jersey residents made late last year to take advantage of the unlimited federal write-off will only be credited on 2018 state tax returns.

CPAs try to highlight problem

The difference between how the federal and state governments are treating the prepayments may not be widely known, and the state CPA organization tried to spread the word by issuing the notice earlier this month.

“Homeowners may be in for shock when they discover that their end-of-year planning to increase their 2017 federal property tax deduction will have no impact on their 2017 New Jersey income tax return,” said Ralph Albert Thomas, the organization’s executive director and chief executive.

Freiman’s bill would ensure as a matter of law that the prepayments could be credited on 2017 state tax returns, and it would also increase the state deduction limit to $20,000 for the 2017 tax year.

“These federal tax changes are bad enough,” said Freiman, a former Prudential Financial executive who was elected to the Assembly last fall. “The state must be flexible and find ways to assist New Jersey homeowners being unfairly and directly impacted, and this is a commonsense step that can help.”

Overhaul NJ property-tax system?

Freiman said he doesn’t know how much a doubling of the state’s deduction limit would impact the current fiscal-year budget, but he suggested a fiscal note would eventually be prepared by the nonpartisan Office of Legislative Services. Under the $34.7 billion spending plan that former Gov. Chris Christie signed into law in early July, a loss of $460 million in income-tax revenue is assumed under the current cap of $10,000.

And while some lawmakers in Trenton have begun to talk about doing away altogether with the state deduction cap after the federal government has now enacted one of its own, Freiman said he would eventually like to see more substantial changes made to the entire property-tax system in New Jersey to bring residents more relief.

“We can’t continue to do the same thing over and over again,” he said.