The Tax Advantages to Paying Property Taxes a Year Early

by Kristine Tucker, studioD Google

If you are a homeowner, there are several tax advantages to paying your property taxes a year early. These advantages apply whether the property is your primary residence or a rental investment. According to the Internal Revenue Service, real estate taxes are entirely tax-deductible, so paying them early will accelerate your federal deductions.

Write Off Entire Tax Bill

Even though real estate taxes may not be due until next year, you can pay them early and write off the entire expense this year. The IRS doesn't penalize you if you pay your property taxes early, and it allows you to take the entire tax deduction whether you pay early or on time. Shifting the tax deduction to this year lowers your taxable income for the year.

Accelerate Tax Deductions

When you pay your property taxes early, you accelerate your tax deductions for the year. For example, if you pay your real estate taxes for next year by Dec. 31 of this year, you can take your property taxes for this year and your property taxes for next year and claim them both as deductible expenses. That doubles your property tax deduction on Schedule A of your tax return. Whether you pay your real estate tax now or wait until the due date, you still get the deduction but if you wait until Jan. 1 to pay the tax, you forfeit your ability to take the deduction now.

Taxes Paid With Escrow

If your mortgage holder pays your annual real estate taxes out of your escrow account, she reports your tax payment on Form 1098. You use that form to report the exact amount of property tax you paid for the year on your federal return. Your escrow account does not have enough in it to pay next year's taxes now. As a result, you need to contact your lender to discuss early property tax payment plans. Depending on the lender, you may be assessed additional fees for making early payments and adjusting your escrow.

Avoid Alternative Minimum Tax

The IRS established the alternative minimum tax to ensure that higher-income individuals, who qualified for so many deductions, didn't wind up paying no tax at all. Paying your property taxes early doesn't force you to pay the alternative minimum tax as long as your income doesn't exceed the limits. According to the IRS, in 2010, a taxpayer had to pay the alternative income tax if his income exceeded $72,450 and he was married and filed jointly or if he was a a qualifying widower, $47,450 if he was single or filed as the head of household, and $36,225 if he was married and filed separately. According to the IRS, real estate taxes are not deductible under the alternative minimum tax. Before you pay your property taxes early, you must make sure that you won't be taxed at the alternative minimum tax. If so, you won't receive the accelerated deductions for your early tax payment.

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