If you haven’t filed your taxes yet, don’t panic — but act fast.
Property tax deduction
Heard of the property tax deduction but aren’t sure what it means? Bankrate explains.
What is a property tax deduction?
Property taxes paid on real estate and personal property may be deducted from federal income taxes. If an individual pays property taxes, claiming the tax deduction is a simple matter of itemizing personal deductions on a tax return.
Some counties, cities, and states levy property taxes on various kinds of property. Real estate is almost always taxed, and each state, county and municipality has its own list of what kind of personal property is taxable, and specifies how taxpayers should determine an item’s taxable value.
Homeowners who itemize their tax returns can deduct state and local property taxes from their federal income taxes. Note that buyers of real estate who pay off delinquent tax liens from earlier years at closing are not allowed to deduct them from federal taxes. Payments such as these should be treated as part of the cost of purchasing a property rather than a property tax deduction.
If a taxpayer pays property taxes by depositing money into an escrow account each month as part of his mortgage payment, he should not treat the entire payment as a property tax deduction. Only the amount that the bank forwards to the Internal Revenue Service (IRS) is eligible for the deduction. That is because the amount a taxpayer pays to an escrow account is adjusted every year to be as close as possible to the exact amount due, but is never exactly the same amount.
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Property tax deduction example
It’s important to remember that only itemized deductions that are above a taxpayer’s standard deduction reduce taxable income. Cassandra’s standard deduction is $10,000, her other itemized deductions amount to $9,000 and she paid $4,500 in property taxes. Her tax liability is only lowered by $3,500 by the property tax deduction because $1,000 is used to match the standard deduction amount.
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