Can I Claim Property Taxes on My Tax Return? The Definitive Guide

Yes, you can claim property taxes on your federal tax return, but with a significant caveat: you can only do so if you itemize deductions instead of taking the standard deduction. Furthermore, there’s a limit to the amount of state and local taxes (SALT) you can deduct, which includes property taxes. Let’s dive deep into the intricacies of claiming this valuable deduction.

Understanding the SALT Deduction

The SALT deduction allows taxpayers to deduct certain state and local taxes paid during the tax year. This includes:

• State and local property taxes.
• State and local income taxes (or sales taxes if you choose to deduct sales taxes instead of income taxes).

Before the Tax Cuts and Jobs Act (TCJA) of 2017, there was no limit on the amount of SALT taxpayers could deduct. However, the TCJA introduced a $10,000 limit for the SALT deduction, which remains in effect for tax years 2018 through 2025. This limitation significantly impacts taxpayers in high-tax states, where property taxes and income taxes are often substantial.

Itemizing vs. Standard Deduction: The Crucial Choice

The decision to itemize or take the standard deduction is central to whether you can claim property taxes. The standard deduction is a fixed dollar amount that reduces your taxable income. Its amount varies based on your filing status and is adjusted annually for inflation.

For many taxpayers, the standard deduction is larger than the sum of their itemized deductions (which include things like mortgage interest, charitable contributions, and, of course, the SALT deduction). In such cases, taking the standard deduction will result in a lower tax liability.

You’ll only benefit from itemizing if your total itemized deductions exceed the standard deduction for your filing status. Therefore, calculate both scenarios and choose the one that results in the lowest tax.

Calculating Your Property Tax Deduction

To calculate your property tax deduction, gather all your property tax bills for the tax year. This includes property taxes paid on your primary residence, as well as any other properties you own, such as a vacation home or rental property.

If your total state and local taxes (including property taxes, income taxes, and potentially sales taxes) are less than $10,000, you can deduct the full amount. However, if the total exceeds $10,000, you are limited to deducting only $10,000.

Important Note: Property taxes that are considered a business expense, such as those related to a rental property, are deducted separately on Schedule E and are not subject to the $10,000 SALT limit.

How to Claim the Property Tax Deduction

If you decide to itemize, you’ll need to complete Schedule A (Form 1040), Itemized Deductions. This form allows you to list all your itemized deductions, including your property taxes.

Here’s a step-by-step guide:

1. Determine your total state and local taxes: Add up all your property taxes, state income taxes (or sales taxes), and any other applicable state and local taxes.
2. Apply the SALT limit: If your total exceeds $10,000, enter $10,000 on Schedule A. If your total is less than $10,000, enter the actual amount.
3. Complete Schedule A: Fill out the rest of Schedule A with your other itemized deductions.
4. Compare to the standard deduction: Compare your total itemized deductions to the standard deduction for your filing status. Choose the higher amount.
5. File your return: File your tax return with either the standard deduction or Schedule A, whichever results in a lower tax liability.

What Documentation Do I Need?

To support your property tax deduction, keep the following documentation:

• Property tax bills or statements: These documents show the amount of property taxes you paid.
• Mortgage statements (Form 1098): These forms may include information about property taxes paid through your escrow account.
• Records of other state and local taxes paid: If you are deducting state income taxes, keep your W-2 forms or other documentation showing state income tax withheld. If you are deducting sales taxes, keep receipts and documentation of your purchases.

Frequently Asked Questions (FAQs)

1. What if my property taxes are paid through my mortgage escrow account?

If your property taxes are paid through your mortgage escrow account, the mortgage company will typically provide you with Form 1098 at the end of the year. This form will show the total amount of property taxes paid on your behalf during the year. You can use this information when calculating your SALT deduction.

2. Can I deduct property taxes on a second home or vacation home?

Yes, you can generally deduct property taxes on a second home or vacation home, subject to the SALT limitation. However, if you rent out your vacation home for more than 14 days during the year, you may need to allocate a portion of the property taxes to Schedule E as a rental expense.

3. I paid property taxes on a home I sold during the year. Can I deduct those?

Yes, you can deduct the property taxes you paid on a home you sold during the year, from January 1 to the date of sale, subject to the SALT limit. These taxes will be prorated, meaning you can only deduct the portion of the year you owned the home.

4. My spouse and I own a home together. How do we claim the property tax deduction?

If you and your spouse file a joint return, you can claim the full property tax deduction, subject to the SALT limit, on your joint return. If you file separately, each spouse can deduct the property taxes they paid. However, if one spouse paid all the property taxes, they can only deduct the portion that is attributable to their ownership share, subject to the $5,000 SALT limit per taxpayer for those married filing separately.

5. What if I paid property taxes late and incurred penalties and interest? Can I deduct those?

You cannot deduct penalties and interest you paid on late property tax payments. Only the actual property tax amount is deductible, subject to the SALT limit.

6. Can I deduct property taxes I paid on a rental property?

Property taxes on a rental property are considered a business expense and are deducted on Schedule E (Supplemental Income and Loss). These taxes are not subject to the $10,000 SALT limit.

7. How does the SALT limit affect me if I live in a high-tax state?

If you live in a high-tax state, your state and local taxes (including property taxes, income taxes, and potentially sales taxes) may exceed $10,000. In this case, you will be limited to deducting only $10,000, even if your actual taxes paid were higher. This can result in a higher tax liability compared to the pre-TCJA era.

8. Can I deduct property taxes if I rent my home?

If you rent your home, you cannot deduct property taxes as an itemized deduction. The property owner, not the renter, is responsible for paying property taxes and claiming the deduction.

9. What if I receive a property tax refund? How does that affect my deduction?

If you receive a property tax refund in the current year for property taxes you deducted in a prior year, you may need to include the refund as income in the current year. This is known as the tax benefit rule. You only need to include the refund as income to the extent that the deduction of the property taxes in the prior year provided a tax benefit. If you didn’t itemize in the prior year or the deduction didn’t reduce your tax liability, you don’t need to include the refund as income.

10. Are there any states that have workarounds to the SALT limit?

Some states have implemented workarounds to the SALT limit, such as allowing taxpayers to make charitable contributions to state-established funds in exchange for tax credits. These contributions may then be deductible as charitable contributions, subject to certain limitations. The IRS has issued guidance on these workarounds, and their effectiveness can vary. Consult with a tax professional to determine if these workarounds apply to your situation.

11. How do I know if itemizing is right for me?

To determine if itemizing is right for you, estimate your total itemized deductions (including the SALT deduction, mortgage interest, charitable contributions, and other eligible deductions). Compare this amount to the standard deduction for your filing status. If your itemized deductions are higher than the standard deduction, itemizing will likely result in a lower tax liability.

12. Where can I find more information about claiming property taxes on my tax return?

You can find more information about claiming property taxes on your tax return on the IRS website (www.irs.gov). Search for Publication 530, Tax Information for Homeowners, and Schedule A (Form 1040) instructions. Consulting with a qualified tax professional is always recommended to ensure you are taking advantage of all available deductions and credits.

Disclaimer: This information is for general guidance only and should not be considered as professional tax advice. Tax laws are subject to change. Consult with a qualified tax professional for personalized advice.