As a homeowner, you will have expenses to cover as long as you own the home. One of those expenses is property taxes.
Property taxes are paid every year to your state and municipality. The median annual property tax bill in the U.S. is $2,578, but your tax bill will vary depending on where you live and your home’s value. Since property taxes are a required expense, understanding how they work is necessary, especially if you are trying to create a family budget after you’ve bought a home.
Here, we explain what property taxes are and how to calculate them.
A report from the Urban Institute, a nonprofit research organization, says that state and local governments collected $577 billion in property taxes in 2019 (the latest year for which national figures were available). Property taxes are part of the cost of owning a home and they are paid every year, so it’s good to know what those taxes are used for and where exactly your money is going.
Property taxes make up a certain percentage of each state’s revenue. State and local governments rely on property taxes to fund community services such as the police department you call in the event of an emergency, the public school your children attend, the public parks and libraries you enjoy, the well-maintained roadways you travel, and much more.
Your state and local governments determine how your property taxes are calculated. If you want to estimate your property taxes, you can use the formula below:
The tax rate can also be expressed as the “millage rate.” One mill equals one one-thousandth of a dollar, or $1 for every $1,000 of home value. The equation would be:
Depending on where you live, the assessed value or fair market value is used in this calculation. The assessed value is determined by your local property appraiser, while the fair market value is how much the home would sell for, based on comparable sales of other properties in the area.
For example, if a home has an assessed value of $300,000 and the millage rate is 29 mills, you will pay $8,700 in property taxes.
Homeowners should note that not all states use 100 percent of the property’s value when calculating the taxable value. For example, homestead exemptions can lower a tax bill. Additionally, some states have property taxation limits that keep property taxes below a certain amount.
You can pay property taxes directly to your local tax authority, but you will want to confirm accepted forms of payment.
You can also add them to your monthly mortgage payments after you’ve bought a home. It’s easier for some people to pay their property taxes this way because it means they don’t owe a big lump sum once a year. Since it is separate from your mortgage payment, the property tax money is placed in an escrow account and sent to your local tax authority on your behalf when the bill is due. A mortgage lender also might require a borrower to pay their taxes this way.
The state and local tax (SALT) deduction allows taxpayers to deduct their property taxes on their federal tax returns, as well as their state income taxes or their sales taxes (but not both income and sales taxes). The Tax Cuts and Jobs Act passed in 2017 limited the SALT deduction to $10,000. Before the 2018 tax year, the SALT deduction had no cap and all state and local taxes were deductible.
You have to itemize your tax deductions to take the SALT. Just taking the standard deduction on your tax return may be quick and easy, but sometimes, itemizing deductions can get you a bigger tax refund, especially if you live in a state with high property taxes. You may need to have a tax professional run both calculations to see which offers the biggest benefit.
Property taxes can be a financial burden for some, but deductions, credits and exemptions can potentially lower property taxes. However, not every exemption is available to all homeowners.
Common exemptions available to homeowners include the homestead exemption and “circuit breaker” programs. The homestead exemption reduces the taxable value of a primary residence by a predetermined amount. The rules for this exemption vary by state.
Property tax circuit breaker programs reduce property tax liabilities for seniors, disabled people, low-income residents and others who qualify. Circuit-breaker tax programs also vary widely among the states that offer them.
Additionally, there are tax deferrals that allow seniors, disabled homeowners and others who qualify to defer property tax payments until the sale of the property or the death of the owner.
You can get details on the programs mentioned above, and other deductions, credits and exemptions, from your local tax authority or by talking to a tax professional.
Written byKristina ByasContributor, Personal Finance
Reposted by KVCore
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