State and feds still at odds over whether prepaid property tax can be deducted

As Tax Day draws near, Minnesota and federal tax officials continue to play chicken over whether property owners who prepaid 2018 real estate taxes can deduct them from their federal taxes this year.

On Wednesday, Minnesota Revenue Commissioner Cynthia Bauerly wrote a letter to the Internal Revenue Service (IRS) in Washington asking for specific guidance on the deduction. But for three months, the federal agency hasn't changed its stance that state or local law would determine whether pre­payments would apply based on when the property taxes were assessed.

A spokeswoman for the IRS said the agency received Bauerly's letter and will be reviewing it.

The federal tax change, signed into law in late December, limited the annual state and local tax deduction at $10,000 for tax years beginning in 2018. Some Minnesotans paid their 2018 property taxes in late 2017 in hopes of deducting them on this year's returns.

That guidance, Bauerly said in her letter, wasn't specific to Minnesota law and its property tax assessment system. Currently, state taxes are calculated using federal taxable income on individual returns.

"Therefore, if the IRS allows the deduction, it will carry forward to the Minnesota return," she wrote.

"The department understands the uncertainty facing Minnesotans," a state Department of Revenue spokesman said late Wednesday in an e-mail. "That is why we have been seeking an answer from the IRS since the beginning of the year and wrote the letter to the IRS this week."

The department has contacted its IRS liaison several times since the start of the year.

Statewide, property owners made a collective gamble totaling approximately $400 million in early payments. Hennepin County set up a temporary service center, extended hours for payment and collected $198 million in prepaid taxes, more than 30 times what was prepaid in 2016.

"Our state's taxpayers and tax professionals need to know how the IRS will treat these prepayments," Bauerly wrote.

"Tax preparers need to know in order to advise their clients and prepare returns accurately. Minnesota taxpayers are filing their returns now, and are anxiously awaiting an answer from the IRS."

David Chanen • 612-673-4465