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$1,000’s in Tax Savings by Timing Property Tax Payment

$1,000’s in Tax Savings by Timing Property Tax Payment

December 03, 2021
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Updated 12/22/2021

Paying this year's property taxes after 1/1/2022 could reduce your income taxes by thousands of dollars! It depends on Congress and the itemized deduction for state and local taxes, referred to as SALT.

A little background. Taxpayers benefit from the higher of the standard deduction or itemized deduction, whichever provides the larger tax benefit when they file their income tax return. For 2021, the standard deduction is $12,550 single or $25,100 married filing joint.  It's a bit more for those age 65 and older.

Four of the more common itemized deductions that you’ll find on your federal Schedule A are:

  1. Medical and dental expenses
  2. WI income taxes plus property taxes i.e. SALT
  3. Mortgage interest
  4. Charitable gifts

Historically, SALT has been capped at a maximum of $10,000 for both single and joint tax filers. Because of the cap, most taxpayers don’t have enough to itemize, so they simply claim the standard deduction. However, that may be changing. The House of Representatives passed a bill on Nov. 19, 2021 raising the cap on SALT to $80,000, and it’s retroactive for 2021. However, the bill stalled in the Senate with 49 in favor and Senator Joe Manchin as the 50th vote needed.  Based on Senator Manchin's Dec. 19th comments on Fox News, passing a bill in 2021 is very unlikely.  Although, Senate majority leader Chuck Schumer has vowed to bring the bill up for vote again in 2022.

What to do? For many, paying your property taxes in the year the SALT cap is increased will be beneficial. For instance, many physicians hit the $10,000 SALT cap with just their WI income taxes. So, paying property taxes doesn’t increase the deduction. However, let’s assume the cap is increased in 2022. By paying property taxes after 1/1/2022, itemized deductions would be increased by the property tax payment. For someone in the 35% tax bracket and $10,000 of property taxes, that’s $3,500 back in their pocket!

There are always exceptions, so who should consider paying property taxes before 12/31/2021?

  1. Owners of rental property because property taxes on rentals are considered a business expense instead of an itemized deduction.
  2. People that qualify for a Minister's Housing Allowance should carefully evaluate their particular situation.
  3. Taxpayers that can itemize but haven't hit the $10,000 SALT cap.
  4. Those who won't be able to itemize in 2022, even if the SALT cap is raised and .  There is a $300 credit on the WI income tax return for paying at least $2,500 of property taxes in 2021.

Everyone else will generally benefit from delaying their property tax payment, assuming Congress provides relief on SALT in 2022. Be sure to work with your tax advisor and defer to their advice for your particular situation. If you don’t have an advisor, feel free to contact me.