2018 Tax Act: Individual Returns- Taxes on Schedule A (1040 Form)

Property taxes, sales tax, and state income tax: An individual taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for married filing separately) for the aggregate of

1.      State, local and foreign personal and real property taxes, not paid or accrued on a trade of business.

2.      State, local and foreign income taxes (or sales taxes in lieu of income taxes) paid or accrued in the taxable year. 

3.      The $10,000/$5,000 cap is not indexed for inflation. 

Foreign real property taxes are no longer deductible. 

There were questions at the end of the year about prepaying property taxes before December 31, 2017.  The IRS came out with a news release on December 28, 2017, indicating that if state and local real property taxes had not be assessed they would not be deductible for 2017.  On January 29, 2018, the AICPA requested that the IRS provide better guidance for cash basis taxpayers.

This tax law change will have the largest impact on the upper middle class who will not be required to pay alternative minimum taxes in accordance with the 2018 tax act changes. Further, those who live in states like New Jersey with both high property taxes and state income taxes will be materially affected.