If you’ve been an adult for, like, two seconds, you know how hard it can be to grow wealth (or pay off debt) when so much of your paycheck is taken away for taxes. When you buy groceries, you have to pay taxes. When you buy gas, you have to pay taxes. When you buy a home, you must pay taxes.
When you own property—land, a house, or a car—you are usually required to pay property taxes to your state or local government each year depending on the value of the property. These taxes frequently assist pay schools, roads, libraries, and first responders.
The property tax deduction is essentially the IRS saying, “Hey, look, we get it—you already paid property taxes to your city or state, so go ahead and deduct them from your federal income taxes.”
That sounds good, doesn’t it? Before you get too excited, you need be aware of the basic rules regarding property taxes.
There are things that are annoying (like those never-ending, diary-style recipe blogs riddled with ads and weird childhood stories) and then there are government rules around taxes. But we have to know them so here we go:
1. The IRS caps the property tax deduction at $10,000 ($5,000 if you’re married filing separately). You may think, Oh, good, I don’t pay that much for property taxes. But keep in mind, this limit isn’t just for property taxes—it includes state and local income and sales taxes too (otherwise known as the SALT deduction). Basically, in the eyes of the IRS, all state and local taxes are bundled together.
Congress capped the SALT deduction at $10,000 in 2017, but there’s been talk of removing or increasing the limit.
2. You have to own the property you’re paying taxes on to claim the property tax deduction. Let’s say you’re helping your parents by paying their property taxes. Even though you paid the tax, you don’t qualify for the tax deduction because you don’t own the property.
3. Property taxes are deductible in the year they’re paid, not the year they’re assessed. So, if you got your property tax bill in December 2023, and you didn’t pay it until this year—2024—you’d have to wait until 2025 (when you file your 2024 taxes) to deduct those property taxes.
4. If you’re using an escrow account to pay property taxes, don’t deduct the amount you put in escrow. Deduct the amount of taxes you actually pay. Even though you put money aside in an escrow account, you’re not paying property taxes until your lender actually pays the tax, which could be significantly less than what you put aside for the year. Your escrow also usually includes money to pay homeowners insurance, which isn’t deductible. Only deduct what your lender pays out, which you should be able to find on Form 1098.
5 Tax Deductions For Homeowners
Owning a home can help you accumulate wealth, but it also incurs expenses such as mortgage payments, maintenance fees, and property taxes. Fortunately, some of these expenses are deductible, which can save you thousands of dollars in taxable revenue.
Itemizing your tax return
To claim deductions on your home, you’ll have to itemize your deductions, which takes more time and effort than claiming the standard deduction. In addition, most free filing services don’t process itemized returns.
These are the standard deduction for tax year 2023 (returns being filed in 2024):
- $13,850 for single filers and married couples filing separately.
- $27,700 for married couples filing jointly
- $20,800 for heads of households.
If all of your itemized deductions total up to less than this, it probably doesn’t make sense to claim the tax breaks on your home. If they’re more than the standard deduction, you may want to hire a tax professional or purchase an online filing program to ensure your return is done correctly and you get the maximum refund.
The paid tiers of H&R Block, TurboTax and TaxAct all allow you to itemize your return.
Mortgage interest
You can deduct the interest you pay on your mortgage each month, lowering your taxable income for the year. This can be especially valuable for new homeowners since most of the payments in the first few years go toward interest, not the principal.
Your mortgage servicer should provide you with a Form 1098 each year indicating how much interest you have paid. Single people or married couples filing jointly can deduct the interest on the first $750,000 of their home, while the cap for married couples filing separately is $375,000 each.
If you took out your mortgage between Oct. 13, 1987, and Dec. 16, 2017, the limit is $1 million for single people and married couples filing jointly or $500,000 for couples filing separately.
There is no cap for mortgages taken out before Oct. 13, 1987.
If you want to save even more money, it may be time to look into refinancing your mortgage. SoFi originates mortgages in all 50 states through its partner Spring EQ, with loans ranging from $5,000 to $100,000. A rebate of up to $500 is available for existing customers and there are also discounts for setting up direct deposit and for autopsy.
Read Also: Will Property Taxes go up in 2024?
SoFi reports its closing time for refinancing averages 28 days, compared to the national average of 42 days as determined by ICE Mortgage Technology.
Ally Bank is another of CNBC’s top mortgage refinance providers, offering fixed and adjustable rate mortgages and jumbo loans, all with no application fees, processing or other lender fees. While Ally doesn’t offer FHA, VA or USDA refinancing, borrowers with government-backed mortgages can refinance to a conventional loan.
Ally Home reports that its online application process enables borrowers to close 10 days faster than the industry average.
Discount points
Homeowners who buy discount points can get a lower interest rate over the life of their mortgage. Depending on your circumstances, you may be able to deduct the cost of these points as a kind of mortgage interest.
According to the IRS, you can deduct discount points in full in the year you pay them if you meet these conditions:
- You use the mortgage loan to buy or build your primary residence.
- Your primary residence is the loan’s collateral.
- Paying points is a common business practice in your area.
- The points paid weren’t higher than what’s typically charged in your area.
- You use the cash method of accounting, which means you report income in the year you receive it and deduct expenses in the year you pay them.
- The points paid weren’t for items usually listed separately on the settlement sheet (like appraisal fees, inspection fees, title fees, attorney fees or property taxes.)
- The funds paid at or before closing, including any points the seller paid, were at least as much as the points you bought. You can’t borrow the funds from your lender or mortgage broker to pay for the points.
- The points were calculated as a percentage of the principal mortgage amount.
- The amount shows clearly as points on your settlement statement.
If you don’t meet any of these requirements, you might still be able to deduct the points on your taxes over the life of the loan.
Property taxes
As a homeowner, you can deduct state and local property taxes from your federal return up to a total of $10,000. ($5,000 if married filing separately.)
According to the IRS, you can also deduct state and county taxes for the maintenance or repair of streets, sidewalks, sewer lines and other local benefit taxes.
Home equity loan or line of credit interest (HELOC)
Both home equity loans and home equity lines of credit (HELOC) allow homeowners to borrow money against the equity they have in their house so far. If you’ve taken out a home equity loan or HELOC and used the funds to make home improvements (or to buy or build another home) you can claim the interest on your return.
You can deduct up to $750,000 if you’re single or a married couple filing jointly, or $375,000 if you’re married filing separately.
If you took out the loan before Dec. 16, 2017, the limit is $1 million for single people and married filing jointly, or $500,000 for married filing separately.
Bank of America provides HELOCs up to $1,000,000, with no application or account fees and typically no closing costs. There are discounts for autopay and Bank of America Preferred Rewards members, and each $10,000 of your initial withdrawal receives a 0.10% interest rate discount (up to a maximum discount of 1.50%).
Home improvements
You can also claim a tax break for certain home improvements.
- Medical home improvements
You can deduct the cost of home improvements as a medical expense if they were intended to help a member of your household. Examples include adding ramps and handrails, lowering kitchen cabinets and adding a porch or stair lift.
If the improvement raised the fair market value of your property, however, you have to deduct the amount of that increase from your deduction.
- Energy-efficient improvements
The maximum credit you can claim each year is:
- $1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150)
- $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers
The credit is nonrefundable, so you can’t get back more than you owe in taxes.
How to Claim Property Tax Deductions
Now, for the part we’ve all been waiting for—how do you claim property taxes on your federal income taxes?
1. Be sure you’re itemizing your deductions.
It’s tax literature’s most infamous question: To itemize or not to itemize? And if you’re not Hamlet (or an accountant), should you itemize or take the standard deduction? If taking the standard deduction will result in a lower tax bill, don’t waste your time itemizing and claiming property taxes. It takes a bunch of deductions to exceed the standard deduction, which is why most taxpayers use the standard deduction instead of itemizing.
2. Find tax bills for your property taxes.
This isn’t the time to guesstimate. You want to be exact about how much you paid in property taxes for the year. If you have a home mortgage, your mortgage company should provide you with a 1098 Form that states how much property tax you paid. If you cut a check to pay your taxes directly, make sure you have the bill or a bank statement showing how much you paid.
If you want to find out how much you paid in taxes for your car, you’ll need your vehicle registration form. That’s also the form you’ll need if you get pulled over for speeding or a busted taillight—so put that in a safe place. Also, don’t speed! And get that taillight fixed.
3. List your property taxes on Schedule A.
When you’re itemizing your deductions, list them on Schedule A before including the total on your 1040. Remember that your property taxes are bundled with state and local income and sales taxes, and your total deduction can’t be more than $10,000 (or $5,000 if you’re married and filing separately).
- Find your tax records. Your local taxing authority can give you a copy of the tax bill for your home. Your paid property tax amount may also be included in a mortgage statement (Form 1098) from the beginning of the year. But you should also scrutinize the registration paperwork on your car, RV, boat or other movable assets. You might be paying property taxes on those, too, and the portion based on the value of the vehicle is probably deductible.
- Exclude the stuff that doesn’t count. You can deduct a property tax only if it’s assessed uniformly at a similar rate for similar property in the community. The proceeds have to help the community, not pay for a special privilege or service for you. Sometimes counties make assessments for improvements. Those may not be deductible if they are not a tax.
- Use Schedule A when you file your return. That’s where you figure your deduction. Note: This means you’ll need to itemize your taxes instead of taking the standard deduction. It’ll probably take more time to do your taxes if you itemize, but you could end up with a lower tax bill. Still, you’ll want to look at where you stand with the standard deduction to see if it’s worth it for you. For the 2022 tax year, the standard deduction ranges from $12,950 to $25,900 for joint filers.
- Deduct your property taxes in the year you pay them. Sounds simple, but it can be tricky. There are two ways people typically pay property taxes on a house: They write a check once or twice a year when the bill comes, or they set aside money each month in an escrow account when they pay the mortgage. Don’t let the second method fool you — deduct only the taxes actually paid during the year.
The IRS doesn’t allow property tax deductions for:
- Property taxes on property you don’t own.
- Property taxes you haven’t paid yet.
- Assessments for building streets, sidewalks, or water and sewer systems in your neighborhood. (Assessments or taxes for maintenance or repair of those things are deductible, though.)
- The portion of your tax bill that’s actually for services — water or trash, for example.
- Transfer taxes on the sale of a house.
- Homeowners association assessments.
- More than $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes
What is the Most Property Tax you can Deduct?
Taxes are rarely simple. Many taxpayers turn to tax attorneys and other experts to help them get it right when filing their taxes. Nobody wants to file inaccurate taxes and possibly be hit with penalties. However, everybody wants to maximize their deductions to minimize the amount of money they owe to the government. Property taxes in California and many other states can be deducted from your overall taxable income. However, depending on your tax situation, this may or may not be the best idea.
Generally, California taxpayers may deduct the amount of money they have paid toward their property taxes from their taxable income. This effectively reduces the amount of income the federal government can tax and reduces the amount of tax they must pay. As of 2024, the maximum amount of property taxes you may deduct is capped at $10,000. However, you may only claim this deduction if you take the itemized deductions instead of the standard deduction. In some cases, the standard deduction may be more beneficial.
Every year California citizens are required to pay their taxes. For many taxpayers, especially those with multiple streams of income or otherwise complicated financial assets, it can be a major pain. Avoid the headache of doing your taxes by calling a California tax attorney for guidance.
Finally
When filing your federal income taxes, you may take the standard deduction available to everyone or an itemized deduction more tailored to your individual tax situation. A person may include many different types of deductions if they take the itemized deduction. People who choose the itemized deduction over the standard deduction are often business owners who deduct certain operating costs from their taxes. Speak to our California tax attorneys to determine if the itemized deduction is right for you.
As of 2024, the standard deduction is $14,600. This means $14,600 will be deducted from your taxable income no matter what kind of deductible expenses you may or may not have incurred. People with nine-to-five jobs and less complicated finances usually take the standard deduction. To make your property tax deductions worth your while, you will need another deduction of at least $4,600. If your itemized deductions do not amount to at least the standard deduction, it may not be worth claiming.