While the passage of the Tax Cuts and Jobs Act (TCJA) in 2018 imposed a cap on the amount you can deduct, the local property tax deduction is still available to homeowners.
Rules for the Property Tax Deduction
You can claim a deduction for real property taxes if the tax is uniform—the same rate is applied to all real property in the tax jurisdiction. The revenues raised must benefit the community as a whole or the government. The tax can’t be paid in exchange for any special service or privilege that only you would enjoy. You must own the property to be able to claim the deduction. The tax isn’t deductible if you pay your mother’s property taxes for her because she is having trouble making ends meet. The tax on her property is not levied on you personally.
You Have To Itemize Your Deductions
You must itemize to take the property tax deduction, and the total of your itemized deductions should be more than the standard deduction you’re entitled to claim for your filing status to make this worth your while. Otherwise, you’ll be taxed on more income than is necessary, jacking up your tax bill rather than reducing it. Property taxes are claimed on Schedule A. You might want to prepare your tax return both ways to make sure that itemizing is in your best interest because the TCJA nearly doubled standard deductions from what they were before its enactment. The standard deduction is set at these figures for the 2022 tax year:
$12,950 for single taxpayers and married taxpayers filing separate returns$25,900 for married taxpayers filing jointly and qualifying widow(ers)$19,400 for those who qualify to file as head of household
The Tax Cuts and Jobs Act Limit
The TCJA limits the amount of property taxes you can claim. It placed a $10,000 cap on deductions for state, local, and property taxes collectively beginning in 2018. This ceiling applies to any income taxes you pay at the state or local level, as well as property taxes. All these taxes fall under the same umbrella. The limit is only $5,000 if you’re married but file a separate return, and property taxes for personal foreign real property were eliminated entirely by TCJA.
Property Taxes Paid Through Escrow
You can deduct the property taxes you pay directly to the taxing authority, as well as any paid into an escrow account that is included in your mortgage payments. In the latter case, your mortgage lender pays the taxing authority on your behalf.
When Real Estate Is Sold
Property taxes are usually split between the seller and the buyer when real estate is sold. The IRS provides specific guidance as to how to determine the amount of property taxes allocated to each. The parties would each pay taxes for the portion of the tax year that they owned the home.
Other Charges on Property Tax Bills
Sometimes property tax bills include charges or fees for services or assessments for local benefits. These aren’t deductible as property taxes. Transfer or stamp taxes or assessments made by a homeowner’s association are also not deductible. Service charges include water service, trash collection services, and other services performed by the government that are related specifically to your property, not to all local properties. Assessments for local benefits mean charges on your property tax bill that are for “local benefits that tend to increase the value of your property,” according to the IRS. They can include things like street or sidewalk construction, or water and sewer systems. They’re not deductible as property taxes because these expenses can increase the value of your property.
Recordkeeping for the Deduction
Keep copies of your property tax statements and any canceled checks or bank statements to show proof of payment. Also, keep any escrow documents from the time the property was purchased or sold because these may show additional payments of property tax that you can also deduct.
Impact on the Alternative Minimum Tax
The property tax deduction is an adjustment item if you’re liable for the alternative minimum tax, sometimes referred to as the AMT. Property taxes aren’t deductible when calculating the AMT. You must add this deduction back into your taxable income.
Year-End Tax Planning Has Changed, Too
Taxpayers used to be able to pre-pay the next installment of their property tax before the end of the year to help boost their itemized deductions in the immediate tax year, but this was eliminated in 2018 with the TCJA. For example, you might have paid your spring property tax installment in December to increase the amount of property tax you paid in the year ending in December and increase the amount of your deduction for that tax year. Attempts to pre-pay any amount before the TCJA took place prompted the IRS to rule that pre-paid taxes would only be deductible going forward if they had already been assessed by the taxing authority with an official billing statement at the time of payment.
