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Denton County property tax prepayment policy curbs attempts to 'beat the system'

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Kyle Martin, Staff Writer

A confusion set over local tax offices across the country in late December as President Donald Trump signed into law the Republican tax bill, which will overhaul federal tax legislation beginning Jan. 1. 

With the tax law overhaul, thousands of taxpayers across the country attempted to file prepayments on their 2018 property taxes to work within a loophole in the tax legislation change. Those who file itemized tax deductions each year likely will see their finances this year and the next are vastly different.

The new tax legislation sets a $10,000 cap on itemized deductions across the board for all income brackets. Those who file $10,000 or less each year in deductions — or who take the standard deduction — won't see the same change, if any, as those who are used to filing more than the new limit. For those who file more than that amount, the new tax legislation means 2018 and onward will hold less savings on their future taxable income from deductions, perhaps significantly so. 

As the last weeks of December stretched on, media outlets across the country reported of major rushes into local tax offices, specifically in heavily wealthy areas with high property taxes. 

Eddie Scotton, as he moved from counter to counter in Denton County's Horn Government Center on Wednesday, said he was hoping to save roughly $1,500 to $2,000 by prepaying the 2018 property taxes on his roughly $300,000 home in Justin.

“People are trying to beat the system to get a tax payment in during 2017 so that they can load up on their tax deductions," said accountant John Baines, the owner of a Denton accounting firm. "But it has to be accepted, and they have to get a receipt.

"So without that [receipt], they [taxpayers] would not be able to claim an extra deduction in 2017. Now that’s different from the way it used to be. They used to accept payments early, but with the tax law changing the way it is, everything is a little bit in an uproar right now.”

Michelle French, the Denton County tax assessor and collector, said local taxpayers' only way to file prepayments on 2018 property taxes would be via an escrow payment agreement — a policy that ultimately curbed attempts to take advantage of a major tax break before the new legislation goes into effect. 

"Michelle French is basically saying there’s not going to be a prepayment allowed,” Baines said. 

An escrow payment agreement is basically a third-party deposit system in which a taxpayer can front-load a lump sum deposit and enter into a payment plan on additional owed monies in the future based upon an estimation of those future debts. 

However, because an escrow agreement is a deposit system, the payments won't be applied to a taxpayer's debts until taxes are levied the following year. All owed monies, whether owed to the tax office or the taxpayer, then would be adjusted and accounted for once taxes are levied.  French said all taxpayers who entered into escrow agreements then would be billed or refunded to adjust for inaccuracies. 

Even still, French reported that in three days — from Wednesday, when her office announced the escrow agreement policy, to the close of business Friday — Denton County office locations processed 85 escrow agreements for local taxpayers. That's more than 20 times the number of escrow agreements processed in December 2016, which had four. 

So why would anyone rush to a tax office to try and make the prepayments? 

"Everything's convoluted," Baines said on Thursday. "We've got a mess on our hands."

To explain it another way, Baines said the act of paying off your 2018 property taxes in 2017 would be similar to saving money by nullifying a monthly payment contract on a car by instead paying it off outright based on a lesser, upfront value, thus saving money on the overall price of the car.

So for a taxpayer to attempt to prepay their 2018 property taxes in 2017, and for a tax office to accept the prepayment and issue a receipt, would mean a taxpayer would successfully, on paper, have recorded the payments as part of their 2017 federal taxable income.

Then the taxpayer’s 2017 taxable income would have been considered to have included any itemized deduction (i.e. property tax) totaling over the incoming 2018 cap of $10,000, meaning taxpayers potentially could have saved thousands of dollars in 2017, depending on whether their tax office accepted such prepayment. 

And then, after a receipt of payment is issued, a taxpayer’s owed monies would not necessarily be adjusted when taxes are again levied in October, depending on future policies and actions taken by state and federal legislatures and taxing authorities, such as the Internal Revenue Service.

“When the 2018 tax returns are prepared, there’s going to be some changes in that arena," Baines said. "So people are trying to get the deductions in 2017, rather than not get it in 2018.”

The IRS, however, levied its own decision regarding 2018 prepayments Wednesday in a public advisory release that said "whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018. A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017." 

Even so, taxpayers still tried to make 2018 prepayments, hoping their local tax clerks would accept them and issue a receipt. 

"If [the tax prepayment is] accepted and you get a receipt, it’s considered paid. If it’s paid and accepted, then you can get the deduction,” Baines said.

French said no 2018 prepayments were accepted outside of escrow agreements in December, likely meaning all those who entered into the agreements either will be billed or refunded in the following year for debts that were overpaid or underpaid.