Home values have been steadily rising for quite a while now. If you’re a homeowner, this is a good thing because it means you’re gaining equity more quickly and this equity can be converted into cash.
If you’re looking to buy, prices that are rising faster than the rate of inflation can indicate a good financial investment added to the obvious benefits of possibly having more space or just having it be a place of your own.
However, there’s a catch. Higher property values generally mean higher property taxes. To an extent, this is a fact of life. But that doesn’t mean you should pay more than you have to. Taking advantage of the exemptions that you qualify for can save you a ton of money.
This article will discuss exemptions and credits you should be on the lookout for as well as giving some basics on how property taxes work.
While we intend to give you good general educational information in this article, everyone’s tax situation is different. If you’re unsure of anything, contact your financial advisor or tax professional. You can also contact your local tax authority.
Why Do We Pay Property Taxes?
Property taxes are the predominant source of local revenue for any services you might get from your local authorities. These could include things like trash pickup and the maintenance of local parks as well as the funding of any road projects.
In addition to city services, your local taxes also go toward funding public school systems. Both the city and the school system can also put forth special millage issues. These ballot referendums often are designated for special projects.
There are a couple of things you need to be aware of before we get into the exemptions and credits associated with your local property taxes. We’ll focus on federal deductions here, but there may be some deductibility at the state level depending on local law. Speak with a tax expert or financial advisor.
The first thing you should be aware of is that there’s a standard deduction you get from your income on federal taxes if you choose not to itemize. It’s not an exemption or a credit, but lowering your taxable income helps lessen the tax bill. The standard deduction for the 2020 tax year is as follows:
- Married and filing separately or single: $12,400
- Married and filing jointly: $24,800
- Heads of household: $18,650
For the 2021 tax year, standard deductions will be as follows:
- Married and filing separately or single: $12,550
- Married and filing jointly: $25,100
- Heads of household: $18,800
Ordinarily, you can only deduct charitable contributions from your income if you itemize your deductions on your tax return. However, for those of you who haven’t filed yet for 2020, this year you can deduct up to $300 in charitable contributions from your gross income. So far this only applies to 2020 and you’ll have to itemize again next year.
If you have nonprofit charitable contributions greater than $300, you might be able to decrease your overall tax liability more by itemizing. We’ll get into how to determine that math in a minute.
State And Local Tax Deductions
If you itemize your deductions, one of the deductions you can take is a state and local tax (SALT) deduction. As part of this, you can either deduct state and local sales taxes or state and local income taxes. It’s important to note taxpayers can’t deduct both of these categories.
Under the same provision of the tax code, you’re allowed to deduct local real estate taxes from your federally reported income. One limitation here is that you can’t deduct more than $10,000 total from your income under this deduction category. That’s including both your property taxes and local income or sales taxes.
Other Deductions And Some Math
When deciding whether to take the standard deduction or itemize, you’ll want to know which results in the greatest limitation of your overall tax liability. In addition to the above-mentioned itemized charitable deductions and state, local and property tax deductions, there are other home -related deductions which may decrease your tax bill if you itemize your federal taxes.
Among important tax deductions for homeowners are the mortgage interest deduction and the ability to deduct maintenance expenses for rental property. You can add these homeowner deductions to any number of other deductions you might qualify for. If the total deduction is higher than the standard deduction, it makes sense to itemize. If not, the standard deduction is the way to go.
Tax Exemptions And Credits
There are two important mechanisms governments have to provide some measure of tax relief to qualified groups. These are exemptions and credits.
A tax exemption is a certain percentage of your taxes that you don’t need to pay. Tax credits allow the government to essentially give you free money. Common examples of this might include credits given by local governments to help first-time home buyers. These credits may or may not have to be paid back at some point. Even if they do have to be paid back, it functions like an interest-free loan.
Tax exemptions are more commonly offered than credits, so let’s take a look at a few of the most utilized categories.
The majority of states have a homestead property tax exemption that allows you to protect a certain amount of the value of your primary residence from taxes. This can either be structured to allow you to exclude a flat amount or a percentage of your taxable value.
Exemptions For Senior Citizens
States often provide tax exemptions for senior citizens after they reach a certain number of years of age. In other cases, it could be based on eligibility for Social Security. The details vary based on the state and there are often residency and income restrictions as well. Some of the statutes just defer the taxes until the property is sold.
You’ll have to read the fine print, but it’s still worth looking into the tax laws in your area.
Exemptions For The Disabled
If you’re disabled, you may be able to get relief from some portion of your property taxes. In this case, there’s a wide variation in local policies. Make sure you know the rules in your municipality.
Regardless of whether you qualify for property tax relief, there are a variety of potential exemptions and credits you could take a look at in other areas of your taxes. For example, home modifications to provide for ramp access or to make it easier to get around inside the house could be deductible on your taxes as medical expenses.
Ask your local authorities about their requirements. You may be required to prove disability or sign an affidavit pursuant to local law.
Exemptions For Service Members And Veterans
Members of the U.S. Armed Forces and veterans are often able to exempt themselves from various taxes, including property tax. The details vary widely by what state you’re in, but it’s definitely worth looking into. Depending on your situation, under this veterans exemption, you may be able to exempt a certain amount of property value or even get a complete waiver from property taxes.
Disabled veterans may have eligibility for special property tax exemptions in certain localities. There may also be special exemptions to lower your property tax bill if you’re a qualifying surviving spouse (typically unremarried). Check with your local treasury or department of revenue.
In certain municipalities, you may be exempt from residential property taxes if you’re a low-income earner. Check local and state law.
What to Do If You Receive an Exemption
If you receive your exemption, please be aware of when it is applied based on when your bill is generated. This way, you can confirm whether or not you have an adjusted bill.
If you’re a Rocket Mortgage® client who has confirmed an adjustment to your taxes before we’ve paid the bill, you can upload the letter to your Documents section within your Rocket Account.
How Your Property Taxes Work
Property taxes help support things like county, city or township government services as well as providing funding for your local school district. They’re calculated based on a unit called the mill. These taxes are paid on real property, which includes things like homes and land. Property not related to homes and land is considered personal property.
If you remember the metric system from school, you may recognize the mill prefix. It means 1/1000th of something. This is how your real property tax is assessed.
Let’s say you had a county with $300 million in assessed value. Out of this tax value, each stakeholder decides (sometimes with the help of a public vote), how much they need to budget for various services. For example, if the school district decided they needed $1.5 million to run their operations, the local school tax would be 0.5%. ($1.5 million/$300 million = 0.5%). If the total property tax rate in an area was 3.5%, on a $200,000 home, that comes out to $7,000 in area property taxes.
Your property tax value may be based strictly on your home valuation, but that’s often not the case.
State laws sometimes limit the maximum amount of your tax liability to a certain percentage of your property value. If an assessor values your home at $200,000 and the state limit for assessed value on the property is 50%, you only pay taxes on $100,000 worth of your property value.
Additionally, because it may be impossible or impractical to reevaluate the value of your house each year, sometimes the values are based on a median or average area value. In other areas, an assessor may not reassess the value of the property every year but only when the property is sold or after a certain period of time.
Finally, states may impose limits on how much your property tax can go up each year, meaning even if your property value increased by 6%, the state may have a law saying that property taxes can only go up by 2%.
If you have an escrow account, it can help make the cost of property taxes more palatable by spreading it out over a 12-month period, but it still makes up a big portion of your monthly mortgage payment, so those exemptions can be important.
In order to get an exemption, you may be required to follow an exemption application. Contact your local tax authority for information.
The IRS has more information on general deductions and credits. Consult your tax advisor or local tax authority before making any decisions. Property owners may also be able to contact their local assessor’s office with questions regarding the value of your home.
What’s The Difference Between A Property Tax Exemption And A Deduction?
We’ve talked about deductions and exemptions, but let’s make sure to touch on the difference before we close this article out.
A property tax exemption is a portion or a full tax amount that you don’t have to pay. It’s wiped away.
By contrast, a deduction just limits your overall tax liability so that you’re still paying the tax, but you’re limiting the amount of income or property value that you have to pay the tax on.
We hope this article has helped you understand property tax exemptions and the role they play in limiting your overall tax liability. If you have any questions specific to your situation, we recommend working with a tax advisor or financial planner.