Most cities and other local jurisdictions assess property taxes in order to pay for local services such as police and fire protection, as well as schools and street maintenance. This property tax is deductible from your taxable income, provided it meets certain criteria. Taking advantage of these deductions can yield some significant tax savings, although the exact amounts you can deduct depend on how much you pay.
Property Tax Deductible
Property taxes and school taxes that you pay to your local or state taxing authority are deductible from your income. You must claim these taxes on your Schedule A when you itemize deductions. If you don't itemize, you're out of luck: you don't get any deductions for these taxes. Property and school taxes are not subject to any minimum amount, such as a percentage of your adjusted gross income, to be eligible. To qualify, your taxes must be based upon the actual value of the property, and charged uniformly across all of the property in the jurisdiction.
The amount you save by deducting property taxes varies. If you are in the 15 percent tax bracket, and you deduct a $2000 tax bill with your itemized deductions, you will save $300 on your federal income taxes. Of course, the amount you actually save depends on how much your itemized deductions exceed the allowable standard deduction for your filing status. For example, the standard deduction for a married couple filing jointly in 2012 is $11,900. If the total of all your deductions is $12,000 and you're in the 15 percent bracket, you'll save only an extra $15 on your tax bill.
Some local jurisdictions assess fees for street repairs and other improvements. These assessments do not meet the IRS test for being applied uniformly across the jurisdiction, because they may only be applied to residents living on a certain street, or in a certain area. Therefore, you cannot deduct them. However, you can add the value of these assessments into the basis for your home, which lowers the capital gain when you sell your home.
Taxes Paid by Someone Else
If someone else, such as a parent, pays the real estate or property taxes on your home, you can still deduct the taxes paid on your Schedule A. The reason for this is that the payment is considered a gift to you, and it is treated as if you paid the property taxes directly yourself. This has upheld by a 2010 tax court decision, where the IRS sued a taxpayer who did not pay the taxes herself, saying that she could not deduct the taxes. The court disagreed.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.