How to Lower Property Taxes for the Year: Prepay Your Real Estate Taxes

A question many tax preparation companies are asked by their customers “How to lower property taxes for the year?” An effective year end tax strategy is to prepay your real estate taxes. If you are in a higher tax bracket this year you will protect more of your income by prepaying your real estate taxes due next year; thus lower taxes this year.

Prepaying your real estate taxes is a standard year end tax planning strategy that many people utilize to lower taxes. This is a very attractive strategy if you will be in a lower tax bracket next year because by prepaying your real estate taxes this year, you are allowed to deduct your prepaid real estate taxes against your current income. This reduces your tax liability for the current year.

How to Lower Property Taxes Example: Jeremy makes $88,000 in 2014, $74,000 in salary and $14,000 in a stock sale of XM Satellite Radio. Next year Jeremy will make $80,000. Let’s assume Jeremy has a real estate tax liability of $1,300 in 2013.

For 2014, Jeremy is in the 28% federal tax bracket. In 2015 he will be in the 25% federal tax bracket. By prepaying his real estate taxes this year Jeremy will protecting more of his income and thus have lower taxes.

One thing you need to do is check with your local tax collector to be sure that you are eligible to do this. Your tax collector may regard the prepayment as a “nondeductible deposit” instead of a payment, thereby negating your deduction for the current year. If in doubt, call your local tax collector and ask.

If your mortgage has an escrow impound account for property taxes, your lender might not allow you to prepay in the current year taxes that become due next year. Again, if in doubt, call your lender and ask.

How to Lower Property Taxes IMPORTANT NOTE:
When you prepay your property taxes in a given year, it’s really only a one-year tax break. Using the above example, let’s assume Jeremy prepaid his 2015 property taxes at the end of 2014. In 2015, Jeremy will get a smaller tax deduction because he’ll pay no property taxes or he will have to continue to prepay his property taxes in future years to get his full tax deduction.

He could counterbalance this by prepaying 2016’s property taxes at the end of 2014.