Should I Pay My Property Taxes Early?

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The property tax deduction is one of the biggest benefits of homeownership — even with the latest tax reform. Though new tax laws cap the deduction at $10,000, the large majority of American homeowners fall under this threshold, meaning they can deduct the full amount of their property taxes year after year, for as long as they’re in the home.

One way that some homeowners try to ease the financial strain is by paying property taxes in advance.

But Can You Pay property taxes in advance?

The answer is yes.

While property taxes are technically due annually, there are some cases where you might want to prepay property taxes — a year ahead of time. Depending on your financial situation, any upcoming changes to tax laws, and other details, it could mean more money saved and healthier cash flow for the next couple of years.

Please keep in mind, though, that while we are mortgage professionals, we are not tax professionals.

Nothing in this blog should be considered tax advice — that’s always going to vary depending on your unique situation. Please contact your CPA, financial advisor, or other tax professional for more specific details.

Paying Your Property Taxes Early

First off, is prepaying property taxes even allowed? Unlike prepaying your mortgage, there aren’t any rules or regulations saying you can’t pay your taxes early.

The main thing you’ll want to consider before pre-paying your property taxes is your personal financial situation and cash flow. If your property tax bill is $4,000 can you afford to double that and pay $8,000 instead?

There is a catch, though — at least if you want to deduct that extra property tax payment on your annual returns. Though you can prepay property taxes as much as you want, you can’t deduct any tax payment if you don’t have the official tax assessor’s bill in hand yet.

In short, you can’t deduct 2022’s tax payment until you have the official balance from your city or county.

These are usually sent out in the fall, so it would mean you’d need to wait until the end of the year to make the payment to ensure you can deduct the full amount come April 15.

If you pay your property taxes early, be sure to know that:

  • You won’t get a tax deduction for the prepayment. However, if there is a cap on property tax deductions, pre-paying may allow you to deduct more than if you pay your bill in subsequent years.
  • Prepayments aren’t subject to the 10% penalty for early withdrawals from retirement accounts like 401(k)s and IRAs. However, they are subject to other penalties like excess contributions and income taxes that may not apply if you make regular payments throughout the year.

Why Would You Want to Prepay Property Taxes?

As long as your two tax payments put together are less than $10,000 — and you make the payment after you’ve received your official tax bill — paying early means double the deduction on your returns. That can significantly reduce your tax burden and increase your subsequent refund.

It also means no tax payment in the new year. This can be helpful if you know money will be tight, are expecting a change in your income or household expenses, or just need to save for some big, upcoming costs.

Keep in mind that prepaying your taxes this year — and taking the deduction — means you won’t be able to deduct those same taxes the next year. That could work in your favor, though. If you know your household will fall into a lower income bracket in the coming year (meaning a lower tax rate), deducting those payments now is definitely more beneficial.

You’ll get to deduct them at your current, higher tax rate, rather than the lower, less expensive one next year. That means more money saved!

When Shouldn’t You Prepay Property Taxes?

If you’re going to go over the $10K limit, prepaying your property taxes likely won’t have much financial benefit. Aside from costing you double (or more), you won’t be able to deduct the full payment on your tax returns, meaning you lose even more cash.

You also probably won’t want to prepay if you’re in an Alternative Minimum Tax state, like New Jersey and New York. These states have a required minimum that residents must pay, so if double-deducting property taxes puts you under that minimum, it doesn’t matter — you still have to pay up (and in full).

Don’t prepay property taxes if you don’t have your official bill yet either, as this disqualifies you from deducting it from your tax returns.

Unless you really need to because of expected income or cash flow changes, you’re better off waiting until next year, closer to the actual deadline. Then you can deduct the full amount and lower your tax burden.

What Happens When You Pay Your Property Taxes in Advance

If you pay your property taxes in advance, you can deduct that amount from your income. However, there are some qualifications for this deduction:

  • You must pay at least half of the total property tax bill by the end of this year. If not, then you won’t be able to deduct anything until next year when you make all of your payments.
  • You must still file state and federal income taxes with all other taxpayers before March 1st or April 15th (depending on which state you live in).

If these conditions are met and you have paid at least half of what it would cost to pay all of your property taxes for the year, then go ahead and fill out Form 4562—Depreciation & Amortization: Section 179 Deduction; Depreciation; Amortization; Alternative Depreciation System Property Deductions – Copy A first page only and attach copies B through K for each year/property as needed.

3 Things to Remember About Prepaying Your Property Tax

If you are considering paying your property taxes early, there are a few things to keep in mind.

  • Pay all of your 2022 taxes before December 31. You will not be able to deduct any prepayments of 2023 property taxes on your 2022 return. If you want a deduction in 2022, make sure that the entire bill is covered by December 31, 2022.
  • Keep good records of prepayments and deductions if applicable. Make sure that any paperwork related to prepayments and deductions are available for auditing purposes if necessary later on down the line. This can help avoid issues with an IRS audit or other investigation into your tax filings for previous years if it’s determined that there was fraud involved (for example).
  • Check with your local tax office before making an early payment decision so that they can let you know if this option is available in their area as well as how much time it takes for them to process payments made prior to January 1st each year

Unsure? Consult a Tax Pro

If you’re in any doubt about whether prepaying your property tax is beneficial — or even allowed — then consult an experienced tax professional.

While we want you to save as much cash as you possibly can, we’re no tax experts — and a CPA or tax planner can give you much more specific guidance for your unique situation.

They can also help you maximize your deductions and save you the absolute most on your annual returns.

Bottom Line on Paying Property Taxes Early

Paying your property taxes early is a good idea for some people, but not for everyone.

First off, it’s important to check with your local tax office first before making a decision. Your county or city may have special rules that apply when paying property taxes early — so even if they say they accept payments early (and most do), they might not accept them on all properties or in the same way as other taxpayers pay their bills.

Last but not least, you may want to consider how much money you can set aside if you choose this option and whether or not it might be better to keep that money in a savings account or invest it elsewhere.

We’re Here to Help

Have any questions about the benefits (tax or otherwise) of homeownership?

Are you ready to take the leap?

Get in touch with a loan officer at Embrace Home Loans today. We’re here to help.

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By Aly Yale / June 8th, 2022 / Categories: / Tags: , ,

Aly Yale

Aly J. Yale is a freelance writer focusing on real estate, mortgage, and the housing market. Her work has been featured in Forbes, Bankrate, The Motley Fool, Business Insider, The Balance, and more. Prior to freelancing, she served as an editor and reporter for The Dallas Morning News. She graduated from Texas Christian University's Bob Schieffer College of Communication with a major in radio-TV-film and news-editorial journalism. Connect with her at AlyJYale.com or on Twitter at @AlyJwriter.