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How the Property Tax Deduction Works for Homeowners?


How the Property Tax Deduction Works for Homeowners?

Property tax deductions can be an important tax write-off for homeowners to save money on their annual tax payments. They can save a significant amount if they deduct property tax payments from their taxable income. Like sales tax, property tax is one of the main ways local governments raise money to pay for the services provided to people who live there, such as police and fire departments, public education and recreational amenities like public parks and playgrounds for children.

Table of contents

Key takeaways...Read more

What is property tax?...Read more

How is property tax calculated?...Read more

Can I deduct property taxes?...Read more

How many property tax deductions can I take?...Read more

When do I report property taxes?...Read more

When are property taxes due?...Read more

What else can I write off from taxes?...Read more

Key takeaways

  • A per diem covers daily expenses on a business trip
  • Companies give them to employees, but freelancers can use a per diem deduction, too
  • Per diems can cover meals, lodging and incidental expenses
If an older homeowner's city or neighborhood changes a lot in those years, and the value of their property increases, while at the same time they have retired from the workforce, they may have difficulty paying their property taxes.

What is property tax?

Every homeowner in the U.S. is required by law to pay a tax on the ownership of their property. Property tax amounts are determined and levied by the county or city a property is in, and they're based on the property’s value. If your home is in Chicago and is worth $250,000, you would pay around $5,225 per year in property taxes.

How is property tax calculated?

When a city or county assesses the value of your property to know how much to require you to pay in property taxes, they do what is called an appraisal. Every area has its own formula for appraising a property, but most start with the market value or the amount that a home would sell for on the market at the time of the assessment. Others use the value that a professional appraiser determines for a property.
Alt text: Image explaining how property tax is calculated with keywords - market value, assessment, appraised ratio, local tax rate, taxes. No relevance to self employed, 1099 or freelancer.
Then, they determine the home's "assessed value" by applying what they call an assessment ratio. This percentage of the home's value is what can be taxed, and these ratios vary wildly across the country. If your property's market value is $250,000 and your local government's assessment ratio is 70%, you would pay taxes on $175,000 rather than the entire $250,000. Assessments take into account all sorts of things that would change how much a buyer would be willing to pay for your home if you sold it. Things like proximity to stores or cultural amenities like museums, or to the beach. If the school district where you live happens to be desirable, it might make your property taxes higher.

Can I deduct property taxes?

The IRS makes deducting property tax possible for homeowners, to lower their taxable income when they pay their annual federal income taxes. Property taxes, also called real estate taxes, on different types of real estate properties can be deducted from taxable income. Personal property tax deductions are also allowed in some circumstances. These deductions only affect income taxes, not self-employment taxes.
Image with text about property ownership and taxes. Includes categories such as primary residence, vacation homes, raw land, and property outside the US. No mention of self-employment, 1099, freelancer, or taxes.
Deductible personal property taxes on items like cars, boats and RVs can lower annual taxes, too. Unfortunately, renters are not allowed to deduct property taxes if they are renting because they are typically not responsible for paying the taxes on a property. Homeowners can only write off the amount of property tax they have already paid and not the taxes they expect to pay in the future. Homeowners association fees are also not allowed to be deducted from a homeowner's taxes because these aren't considered property taxes. The same is true for home services like trash or water service. Personal property like the cars and boats mentioned above can come with state and local personal property taxes or excise taxes. As long as the tax is based on the property’s value, the owners can deduct the amount of the tax they pay.
Image shows text about requirements for deducting personal property tax. Tax is imposed annually on personal property based on its value. No mention of self employed, 1099, freelancer or taxes.

How many property tax deductions can I take?

The property tax amount that you can deduct depends on a few things. The most important is probably whether you choose to itemize your taxes or go with the standard deduction on your annual taxes. This is because you can't claim property tax deductions if you claim the standard deduction. Deducting your property taxes is only an option if you itemize. The Tax Cuts and Jobs Act of 2017 placed a cap on deducting taxes, including property taxes. The most you can deduct is $10,000 ($5,000 for those who are married filing separately). If your county recently did an assessment, and you now owe $12,000 in property taxes on your $400,000 house, you won't be able to deduct the full amount. Or, maybe you only have $4,000 in property taxes this year, but you also owe $5,000 in income taxes and $2,000 in other federal taxes, for a total of $11,000. That $10,000 limit applies to all types of state and federal taxes combined, so you wouldn’t be able to deduct that last $1,000 from your taxable income. A general rule for self-employed individuals and entrepreneurs is that itemizing is usually the way to save more on your taxes. But for some people, the standard deduction offers more savings. For 2022, the standard deduction is $12,950 for single filers and married couples filing separately, $25,900 for married couples filing jointly and $19,400 for heads of household. The choice is yours on whether to choose the standard deduction vs. itemized deductions. The only way to know which makes the most financial sense in your personal situation is by taking the time to do the math before you file your taxes.

When do I report property taxes?

To claim the itemized deduction, you need to report your personal property taxes on Schedule A, Line 5c, as part of your 1040 form. There may be taxes you have paid that are also eligible to be deducted from your taxable income, but they are not reported here. If you're looking to report deductions from your 1099 employee taxes, you should do it on Schedule C.

When are property taxes due?

The rules are different in every county when it comes to property taxes. In some areas, the taxes are collected once a year. Other counties collect property taxes quarterly. Property taxes are paid in one of two ways whenever they are due. You can make a direct payment to the city or county that levies the tax or set up an escrow account. For homeowners who financed their home, this is an account that's set up for the buyer by the lender. The lender estimates property taxes for the upcoming year, then breaks that amount into 12 payments added to the monthly mortgage payment. Escrow accounts are often a requirement for getting a home mortgage so that borrowers don't default on their property taxes.

What else can I write off from taxes?

Itemizing deductions opens up a whole realm of tax savings to self-employed individuals and freelancers who can claim an extremely wide range of expenses as deductions from their taxable income. FlyFin can help self-employed individuals find every possible deduction using A.I. and 24/7 support in the app from expert tax CPAs. FlyFin also has an estimated tax calculator that can help you make your quarterly payments on time.

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