While the federal government relies on income taxes as its primary source of revenue, and state governments typically rely on a combination of state income and sales taxes, local governments derive a significant portion of their revenue from property taxes. Even though the federal government does not derive a benefit from state and local property taxes, the Internal Revenue Service offers a tax deduction for property taxes to taxpayers who itemize their deductions.
Property Tax by Year
The IRS includes property taxes, including both real estate taxes and personal property taxes, with its list of taxes you can deduct on your federal income tax return as long as you itemize your deductions. You can only deduct property taxes you actually paid during the tax year, so if you want to take a deduction for your property taxes on your current year's tax return, you must pay them before the new year begins.
Taxes Actually Paid
To be deductible, your property taxes must be imposed on you, they must be based on the assessed value of your property and they must be charged uniformly throughout the taxing jurisdiction. Before you can deduct your property taxes, you must have actually paid those taxes to the taxing authority. Payments you made into an escrow account that have not actually been paid to the taxing authority don't count.
Taxes Imposed on You
You can only take a tax deduction for paying property taxes that were actually imposed on you, regardless of what time of year you paid those taxes. For example, if you purchased a home that had property taxes in arrears and you agreed to paying property taxes at closing as a condition for the sale, you cannot take a tax deduction for the back property taxes since those taxes weren't imposed on you. Likewise, if you paid the property taxes for your child's home, you could not take a tax deduction, because the property taxes were imposed on your child, not you.
Past, Present, Future
You can deduct property taxes that were imposed on you. These are taxes that were due and that you actually paid to the taxing authority. If you owed back property taxes for previous years and you paid them during the current tax year – up through Dec. 31 – you can deduct those taxes when you file your federal income taxes. That can make a big difference if you're deciding whether to pay property taxes in December or January.
Paying your property taxes in advance of their due date offers no tax advantage. You cannot deduct any tax payments you made during the current year that you paid in advance for subsequent years. For example, if you pay your 2019 property taxes in 2018, you cannot deduct those taxes on your 2018 federal income tax return. You can deduct those taxes when you file your 2019 tax return.
Pay Attention to Tax Penalties
The IRS does not care whether you deduct your property taxes or not, nor does it act as a tax collector for state and local property taxes. Whether or not you pay your state and local property taxes will not result in a tax penalty from the IRS, but it could get you into trouble with your state and local taxing authority. Tax laws vary from state to state, but delinquent property taxes typically result in interest on the unpaid amount plus tax penalties. In some cases the taxing authority might even seize your property for nonpayment of taxes. Property tax due dates vary by taxing authority and may not coincide with the new year.
TCJA Changes to SALT Deduction
Property taxes fall under the State and Local Tax deduction that many taxpayers take. It's important to note changes that were made to this deduction under the Tax Cuts and Jobs Act. Those deductions are now capped at $10,000 for all SALT payments you list on your tax return. This can change the tax benefits of property tax, if you itemize your deductions every year.
- Internal Revenue Service: Topic 503 -- Deductible Taxes
- Internal Revenue Service: Publication 530, Real Estate Taxes
- Internal Revenue Service: Publication 17, Real Estate Taxes
- Michigan Department of Treasury: Real Property Tax Forfeiture and Foreclosure
- MWCPA: How the New Limit on SALT Deductions Affects Homeowners
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