In the interest of encouraging homeownership, national laws give citizens a deduction of property taxes paid from their gross income when figuring taxable net income. Although subject to restrictions and conditions, the land tax deduction nevertheless affords useful financial aid to homeowners, many of whom are subject to property taxation in addition to sales and income taxes in their state. The deduction is strongly supported by the general public and will in all likelihood be maintained by the Internal Revenue Service later on.
Dating and Recordkeeping
To be allowable, the tax must be levied on you and must have been paid during the tax year for which you’re claiming the deduction. You must obtain copies of your tax assessments, in addition to documents of payment, and keep them in case of an IRS audit of your tax return.
Restrictions
Any state, local or foreign taxes on your property are allowable, provided that the same tax is imposed on all other property locally. There is no limit on the quantity of the deduction, though it isn’t readily available to taxpayers subject to the Alternative Minimum Tax (AMT). The tax must have been based on the appraised value of your property, and it must have been levied and paid during the tax year for which you’re claiming the deduction.
Escrow Accounts
The mortgage lender who pays property taxes from an escrow account can provide a complete accounting of when the tax has been paid and in what amount. The part of your monthly payment which goes into the property tax escrow account isn’t deductible. Only the payout from the creditor to the taxing authority is allowable, and only in the year it had been made. In addition, property taxes assessed but not paid by the vendor of your house, and which were rolled into the last closing cost, are also allowable.
Assessments and Fees
Unless they are used for maintenance or repair, assessments charged to your property for municipal improvements, such as new sewer or water lines, are not normally deductible, although they are in effect a local property taxation. In addition, regular fees charged to owners, such as homeowner’s association dues, are not deductible.
Non-Itemized Returns
The property tax deduction must be itemized on Schedule A of the federal 1040 tax return. Normally, taxpayers who choose a standard deduction, rather than itemizing, might not deduct property taxes out of their earnings. But, Congress passed an amendment effective in 2008 that makes it possible for those who do not itemize to have a property tax deduction of up to $500 should they file as single up to $1,000 fif they are married couples filing joint returns.
California Homeowner Assistance
For fiscal year 2007, California passed a Homeowner Assistance Program, which allowed one-time obligations to qualified homeowners that represent a partial refund of the local property taxation. However, the state’s ongoing budget crisis persuaded legislators to defund the program for 2008 and 2009, and potential financing for homeowner help is doubtful.