Property taxes: what they are and how to calculate them

As a homeowner, you will have expenses to cover while you own the home. One of those expenses is property taxes.

Property taxes are paid each year to your state and municipality. The average annual property tax bill in the US is $2,578, but your tax bill will vary depending on where you live and the value of your home. Since property taxes are a mandatory expense, it’s necessary to understand how they work, especially if you’re trying to create a family budget after you’ve purchased a home.

Here we explain what property taxes are and how to calculate them.

What are property taxes?

A report from the Urban Institute, a nonprofit research organization, says state and local governments collected $577 billion in property taxes in 2019 (the latest year for which national figures are available). Property taxes are part of the cost of owning a home and are paid every year, so it’s good to know what those taxes are used for and where exactly your money is going.

Property taxes make up a certain percentage of each state’s revenue. State and local governments rely on property taxes to fund community services, like the police department you call in an emergency, the public school your children attend, the public parks and libraries you enjoy. , the well-maintained roads you travel on, and much more.

How do I calculate property taxes?

Your state and local governments determine how your property taxes are calculated. If you want to estimate your property taxes, you can use the following formula:

Assessed home value x tax rate = property tax

The tax rate can also be expressed as the “millage rate”. One mill is equal to one thousandth of a dollar, or $1 for every $1,000 of home value. the equation would be:

Cadastral value x mills / 100 = property tax

Depending on where you live, either the appraised value or the fair market value is used in this calculation. The appraised value is determined by your local property appraiser, while the fair market value is what the house would sell for, based on comparable sales of other properties in the area.

For example, if a home has an appraised value of $300,000 and the millage rate is 29 thousandths, you will pay $8,700 in property taxes.

$300,000 x 29 mills / 1,000 = $8,700

Homeowners should note that not all states use 100 percent of the property’s value when calculating taxable value. For example, homestead exemptions can reduce a tax bill. Also, some states have property tax limits that keep property taxes below a certain amount.

How are property taxes paid?

You can pay property taxes directly to your local taxing authority, but you’ll want to confirm accepted forms of payment.

You can also add them to your monthly mortgage payments after you’ve purchased a home. Some people find it easier to pay their property taxes this way because it means they don’t owe a large lump sum once a year. Since it is separate from your mortgage payment, the property tax money is placed in an escrow account and sent to your local taxing authority on your behalf when the bill is due. A mortgage lender might also require a borrower to pay their taxes this way.

Deduction of your property taxes

The state and local income tax (SALT) deduction allows taxpayers to deduct their property taxes on their federal tax returns, as well as their state income taxes or sales taxes (but not both state income taxes). such as sales tax). The Tax Cuts and Jobs Act passed in 2017 capped the SALT deduction at $10,000. Prior to tax year 2018, the SALT deduction was unlimited and all state and local taxes were deductible.

You have to itemize your tax deductions to take the SALT. Simply taking the standard deduction on your tax return can be quick and easy, but sometimes itemizing deductions can give you a larger tax refund, especially if you live in a state with high property taxes. You may need to have a tax professional perform both calculations to see which offers the greater benefit.

Common Property Tax Exemptions

Property taxes can be a financial burden for some, but deductions, credits, and exemptions can potentially reduce property taxes. However, not all exemptions are available to all homeowners.

Common exemptions available to homeowners include the homestead exemption and “circuit breaker” programs. The homestead exemption reduces the taxable value of a primary residence by a predetermined amount. The rules for this exemption vary by state.

Property tax breaker programs reduce property tax obligations for seniors, people with disabilities, low-income residents, and others who qualify. Disruptive tax programs also vary widely among the states that offer them.

In addition, there are tax deferrals that allow seniors, disabled homeowners and others who qualify to defer property tax payments until the sale of the property or the death of the owner.

You can get details about the programs listed above and other deductions, credits, and exemptions from your local taxing authority or by speaking with a tax professional.

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