March 20, 2018

California Property owners rush to pay Property Taxes

California’s tax revenues far exceeded expectations in January for the second consecutive month, but it remains to be seen how much of the excess reflects underlying strength in the economy and property tax values, versus people speeding up their 2017 income and deciding to pay property taxes early while they were still fully deductible on federal tax returns.

Property Owners also pre-paid the second installment of property taxes which are due no later than April 10th of 2018 to qualify for the full income tax deduction.

In December, total state income taxes came in a whopping $4 billion ahead of expectations, with $3.2 billion of that surprise coming from personal income taxes.

When the December numbers came in, the Legislative Analyst’s Office speculated that the positive results “could be partially offset by softer January and April collections, as some taxpayers may have made final 2017 tax payments a few months early in order to maximize deductions under the recently passed federal tax plan.”

State income tax revenues for January totaled $16.3billion, which was $2.5 billion higher than was expected in its current forecast released in January.

Starting this year, taxpayers who itemize on their federal returns can deduct a total of $10,000 in all state and local taxes (including income and property taxes) combined. Previously, this deduction was unlimited.

After the federal tax bill passed in mid-December, many Californians who exceeded that limit scrambled to pay the property tax they expected to owe for 2017 by Dec. 31, so they could deduct all of it on their 2017 federal returns. If they waited to pay these taxes until 2018, they would be subject to the $10,000 limit, even if taxes paid were for tax year 2017.

Normally taxpayers have until mid-January to make their last estimated state income tax payment for the previous year, and until mid-April to pay the remainder of their property tax and state income tax due for the previous year. That’s why California usually sees tax revenues spike in January and April.

So the January number — $13.1 billion — was $2.4 billion ahead of revised expectations but only slightly ahead of the state’s previous assumption.

How much of the overage was prepayments, versus economic strength? The timing of when the taxes came in suggests a fair amount was prepayments.

If people mailed their state tax payment or submitted it electronically on the last couple days of the year, it would qualify as a 2017 deduction but would not be processed by the state until January, according to the California Department of Finance.

The department says payments to the Franchise Tax Board in the first week of January were 85 percent higher than the same period last year, while payments in the remainder of the month were 41 percent lower year over year.

“When we see April receipts, we will get a clearer picture of the extent to which the surge we saw in late December and early January is associated with a timing issue or an acceleration of payments and how much may be related to underlying growth,” said H.D. Palmer, a department spokesman. “If we see a significant drop-off in April receipts that might be an indicator that a lot of what happened was a timing issue. This is a review of an article written by Kathleen Pender a San Francisco Chronicle columnist.