Property Tax Deductions: How Property Tax Deductions Work

Property taxes are annual taxes that property owners pay based on the assessed value of their personal property. A property tax deduction refers to a policy of the US Internal Revenue Service that allows taxpayers to deduct a portion of these tax expenses from their yearly federal income taxes. These expenses can include items such as mortgage interest, state and local taxes on real estate such as homes, land, or apartments, and taxes paid on personal property like boats or automobiles.

People who claim property tax deductions can either itemize their deductions using receipts and records or take the federal standard deduction. This amount of money is subtracted from your yearly taxable income, which can limit the amount of money a person owes to the government.

For example, if your income in 2021 was $60,000, and you paid $10,000 in property taxes, you may deduct that amount from your income. This means that you will only be taxed on $50,000 for the year. Some homeowners will set aside money each month in an escrow account that is used to pay that year’s property taxes. This saves a taxpayer from not paying enough in property taxes and owing more to the government when their tax returns are due.

Taxpayers may be eligible to deduct real property taxes and personal property taxes from their yearly returns. Real estate taxes that a person pays on real property like their primary residence, vacation homes, co-op apartments, raw land, and any property outside of the United States may be eligible for property tax deductions. Taxes that people pay on personal property like cars, RVs, and boats may also be eligible for property tax deductions.

Property tax can only be deducted on recurring taxes that a property owner pays on their asset. The US IRS will not allow property tax deductions for property taxes that haven’t been paid yet or taxes that you paid a previous year. Renters are not eligible to deduct property tax payments from their yearly income taxes. Services that benefit real property like water and trash collection are not tax-deductible. Homeowners association assessments and fees are also not deductible from your yearly income taxes.

Property tax deductions can save taxpayers money by reducing their yearly taxable income, with the sum of their paid property taxes subtracted. However, there are a series of elements that one should consider before they claim a property deduction on their income tax return.

1. 1. Experts will be able to help make the most of the deduction. A certified public accountant (CPA) or tax professional can help taxpayers figure out their personal deduction limits. Taxpayers can claim the standard deduction (which changes every year) or make itemized deductions, which may make them eligible for more than the standard deduction.
   
2. 2. The tax laws are subject to change. The standard deduction changes every year, so it’s helpful to stay up to date with tax codes.
3. 3. Try to prepay your property taxes. If your property tax bill is due next year, but you are able to pay it early. You may be able to deduct the amount this year instead of the next, but it is not guaranteed.

Here is an overview of how a person may be able to claim a property tax deduction.

1. 1. The taxpayer gathers their tax records. While your local taxing authority will be able to provide someone with a copy of the tax bill for their home, they should also inspect the registration paperwork for their car, boat, or other movable assets. If they are paying property taxes on those, this amount of money may be deducted from their income taxes.
2. 2. Taxpayers should use Schedule A when filing. Schedule A is an IRS form that’s used to itemize deductions on a person’s federal income tax return. To deduct real property taxes, taxpayers should go with itemizing rather than taking the standard deductions. The form itself is a place for people to tally their deductible expenses, including any property taxes that they intend to deduct. This form also includes the option for filers to deduct the amount of mortgage payment interest they paid over the tax year.
3. 3. Deduct the taxes paid in this current year. It is important to remember that the money set aside to pay property taxes—like funds in an escrow account—is not the same as actually paying those taxes. Property taxes only become deductible when the mortgage company pays the county or local government.

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