Property taxes are a significant expense for homeowners, but fortunately, the Internal Revenue Service (IRS) offers property tax deductions that can help reduce the amount of overall taxes property owners have to pay. Here is a look at how property tax deductions work and how they can benefit homeowners.
What are property tax deductions?
A property tax deduction is an amount of money that homeowners can subtract from their taxable income to reduce the amount of tax they owe. The deduction is based on the assessed value of the property and the local tax rate. Homeowners can claim a property tax deduction on their federal income tax returns if they itemize their deductions rather than taking the standard deduction.
How much can you deduct?
The amount of property tax that can be deducted is subject to certain limits. For the 2021 tax year, the maximum amount of property tax that can be deducted is $10,000. This limit applies to both single and married taxpayers. In addition, taxpayers who own multiple properties can only deduct the property taxes on one property.
When can you take deductions?
It is important to note that property taxes can only be deducted in the year they are paid. For example, if a homeowner paid property taxes in 2021 for the 2020 tax year, the deduction can only be claimed on the 2021 tax return.
How are property taxes calculated?
Property taxes are usually assessed by the local government and are based on the value of the property. The tax rate is then applied to the assessed value to determine the amount of property tax owed. The tax can be paid annually, semi-annually, or quarterly, depending on the local government’s policy.
Where do you send a payment for property taxes owed?
Homeowners can pay their property taxes directly to the local government or through an escrow account held by their mortgage lender. If the taxes are paid through an escrow account, the
homeowner’s monthly mortgage payment will include an amount for property taxes, which will be held in the escrow account until the taxes are due.
Maintaining accurate records
It is important for homeowners to keep accurate records of their property tax payments to ensure that they can claim the maximum deduction allowed by the IRS. Homeowners should keep copies of their property tax bills and canceled checks or receipts for any payments made.
Obtain professional advice
Just to be sure you will want to consult a financial professional when it comes to tax planning, including how to leverage available property tax deductions. It is also a good idea to integrate your plan for the real estate you own into a comprehensive financial plan which can help to maximize generational wealth. Also, do not forget to create an estate plan to ensure your assets go to your preferred beneficiaries. Your financial advisor will be able to guide you through the process of formulating the best financial strategy and estate plan to meet your wealth management goals.