Deducting property taxes saves money on income taxes
They say only two things in life are certain: death and taxes. What is not certain is how much tax a person will pay. When it comes to federal income taxes, the bite can be substantial. The top bracket of income tax hits taxpayers a total of 35% of their taxable income. The only way to pay less tax is to take full advantage of all available tax deductions.
Unfortunately, despite the claims of numerous books, infomercials, and websites, there are surprisingly few income tax deductions that can be used by most taxpayers who are not in a special situation, such as owning a business, managing a farm or have a substantial trust or investment income. Many things that are technically tax deductible are not of much use to most taxpayers because a specific floor or minimum must be reached before these things become viable tax deductions. For example, while medical expenses may be tax deductible, that’s only true for the number of medical bills that exceed 9% of your income. In other words, unless your medical bills were huge, there is no deduction for you.
The good news is that there are several substantial tax deductions available to taxpayers who own real estate. The government continues to encourage American home ownership through several substantial tax breaks. Most people are aware that interest on a mortgage is tax deductible for most people, for example. Also, on new mortgages, the points paid on the loan are also deductible.
Less well known is the property tax deduction. Deducting money paid in taxes is one of the most sought-after tax deductions by people seeking professional tax advice from an enrolled agent, certified public accountant (CPA), or other tax professional. Desire is not difficult to understand. It seems very unfair to me to have to pay taxes on money that has already been used to pay taxes. When it comes to property taxes, the tax code agrees.
Some taxpayers don’t deduct property taxes on their income taxes because they forget to pay them. This is because many mortgages are set up with an escrow account where the bank or lender holds funds to pay for things like homeowners insurance and property taxes on the borrower’s behalf. The owner pays an additional amount each month as part of his required monthly payment. This additional money is held in the escrow account until it is time to pay a designated expense. Although the mortgage company writes the check to pay property taxes on a home, it uses the borrower’s money to do so, so the deduction belongs to the homeowner, not the bank.
Where to deduct property taxes
To deduct property taxes, fill in the appropriate amount on IRS Form, Schedule A (Itemized Deductions). Deduct your property taxes on Line 6 (Real Estate Taxes). For homeowners who pay their property taxes through an escrow account through their mortgage company, the total taxes paid are generally included on the Form 1099-INT submitted by the lender. For homeowners who pay property taxes themselves, it may be necessary to review financial records to find the amount. Keep in mind that many states, cities, and counties require property tax payments twice a year, so be sure to count both payments to avoid deducting only half of the amount actually paid.