How To Calculate Property Tax: What All Homeowners Should Know

Need to know how to estimate your property tax? You’ve come to the right place! Most people know that homeownership requires coughing up copious amounts of money. There’s your mortgage, of course, but the costs hardly end there. You will also have to pay property tax.

If you already own a home, you can look at how your tax is calculated on the most current property tax statement. If you’re considering buying a home, look on the real estate listing for assessment and tax information, or go to the county website to find out the annual property tax.

Be aware that property taxes can change. The assessed value of your house can go up or down, depending on the local real estate market. Your assessment can also rise or fall depending on changes you make to your house—for example, if you make additions to your property. And the tax rate can change depending on your local government.

Even though the government sends you a tax bill every year and tells you how much you owe in property taxes, it’s important to know how that tax is calculated.

How to calculate property tax

There are a number of factors that come into play when calculating property taxes, from your property’s assessed value to the mill levy (tax rate) in your area. Here’s how to calculate property tax so you don’t end up blindsided by this hefty homeowner expense.

What is a home’s fair market value?

The market value of a home is basically the amount a knowledgeable buyer would pay a knowledgeable seller for a property, assuming an arm’s-length transaction and no pressure on either party to buy or sell. When a property sells to an unrelated party, the sales price is generally assumed to be the fair value of the property.

What is a home’s assessed value?

One factor that affects your property taxes is how much your property is worth. You probably have a good understanding of your home’s market value—the amount of money a buyer would (hopefully) pay for your place. (You could also enter your address in a home value estimator to get a ballpark figure.)

Still, tax municipalities use a slightly different number; it’s called your home’s assessed value.

Tax assessors can calculate a home’s current assessed value as often as once per year. They also may adjust information when a property is sold, bought, built, or renovated, by examining the permits and paperwork filed with the local municipality.

They’ll look at basic features of your home (like the acreage, square footage, and number of bedrooms and bathrooms), the purchase price when it changes hands, and comparisons with similar properties nearby.

Sometimes a home’s assessed value will be strikingly similar to its fair market value—but that’s not always the case, particularly in heated markets. In general, you can expect your home’s assessed value to amount to about 80% to 90% of its market value. You can check your local assessor or municipality’s website, or call the tax office for a more exact figure for your home. You can also search by state, county, and ZIP code on publicrecords.netronline.com.

If you believe the assessor has placed too high a value on your home, you can challenge the calculation of your home’s value for tax purposes. You don’t need to hire someone to help you reduce your property tax bill. As a homeowner, you may be able to show how you determined that your assessed value is out of line.

What is taxable value?

The taxable value of your house is the value of the property according to your assessment, minus any adjustments such as exemption amounts.

What’s a mill levy?

In addition to knowing your home’s assessed value, you will need to know another number, known as a mill levy. That’s the tax assessment rate for real estate in your area. The tax rate varies greatly based on the public amenities offered and revenue required by local government.

If you have a public school, police force, full-time fire department, desirable school districts, and plenty of playgrounds and parks, your property tax rates will be higher than a town without them. (Hey, you get what you’re taxed for!)

Your area’s property tax levy can be found on your local tax assessor or municipality website, and it’s typically represented as a percentage—like 4%. To estimate your real estate taxes, you merely multiply your home’s assessed value by the levy. So if your home is worth $200,000 and your property tax rate is 4%, you’ll pay about $8,000 in taxes per year.

Where to find property taxes

Thankfully, in many cases, you may not have to calculate your own property taxes. You can often find the exact amount (or a ballpark figure) you’ll pay on listings at realtor.com®, or else you can enter a home’s location and price into an online home affordability calculator, which will not only estimate your yearly taxes but also how much you can anticipate paying for your mortgage, home insurance, and other expenses.

For more smart financial news and advice, head over to MarketWatch.

Source: realtor.com

7 Tax Benefits of Owning a Home: A Complete Guide for Filing This Year

What are the tax benefits of owning a home? Plenty of homeowners are asking themselves this right around now as they prepare to file their taxes.

You may recall the Tax Cuts and Jobs Act—the most substantial overhaul to the U.S. tax code in more than 30 years—went into effect on Jan. 1, 2018. The result was likely a big change to your taxes, especially the tax perks of homeownership.

While this revised tax code is still in effect today, the coronavirus has thrown a few curveballs. For one, the Internal Revenue Service has delayed filing season by about two weeks, which means it won’t start accepting or processing any 2020 tax year returns until Feb. 12, 2021. (So far at least, the filing deadline stands firm at the usual date, April 15.)

In addition to this delay, many might be wondering whether the new realities of COVID-19 life (like their work-from-home setup) might qualify for a tax deduction, or how other variables from unemployment to stimulus checks might affect their tax return this year.

Whatever questions you have, look no further than this complete guide to all the tax benefits of owning a home, where we run down all the tax breaks homeowners should be aware of when they file their 2020 taxes in 2021. Read on to make sure you aren’t missing anything that could save you money!

Tax break 1: Mortgage interest

Homeowners with a mortgage that went into effect before Dec. 15, 2017, can deduct interest on loans up to $1 million.

“However, for acquisition debt incurred after Dec. 15, 2017, homeowners can only deduct the interest on the first $750,000,” says Lee Reams Sr., chief content officer of TaxBuzz.

Why it’s important: The ability to deduct the interest on a mortgage continues to be a big benefit of owning a home. And the more recent your mortgage, the greater your tax savings.

“The way mortgage payments are amortized, the first payments are almost all interest,” says Wendy Connick, owner of Connick Financial Solutions. (See how your loan amortizes and how much you’re paying in interest with this online mortgage calculator.)

Note that the mortgage interest deduction is an itemized deduction. This means that for it to work in your favor, all of your itemized deductions (there are more below) need to be greater than the new standard deduction, which the Tax Cuts and Jobs Act nearly doubled.

And note that those amounts just increased for the 2020 tax year. For individuals, the deduction is now $12,400 ($12,200 in 2019), and it’s $24,800 for married couples filing jointly ($24,400 in 2019), plus $1,300 for each spouse aged 65 or older. The deduction also went up to $18,650 for head of household ($18,350 in 2019), plus an additional $1,650 for those 65 or older.

As a result, only about 5% of taxpayers will itemize deductions this filing season, says Connick.

For some homeowners, itemizing simply may not be worth it. So when would itemizing work in your favor? As one example, if you’re a married couple under 65 who paid $20,000 in mortgage interest and $6,000 in state and local taxes, you would exceed the standard deduction and be able to reduce your taxable income by an additional $1,200 by itemizing.

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Watch: Ready To Refinance? Ask These 5 Questions First

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Tax break 2: Property taxes

This deduction is capped at $10,000 for those married filing jointly no matter how high the taxes are. (Here’s more info on how to calculate property taxes.)

Why it’s important: Taxpayers can take one $10,000 deduction, says Brian Ashcraft, director of compliance at Liberty Tax Service.

Just note that property taxes are on that itemized list of all of your deductions that must add up to more than your particular standard deduction to be worth your while.

And remember that if you have a mortgage, your property taxes are built into your monthly payment.

Tax break 3: Private mortgage insurance

If you put less than 20% down on your home, odds are you’re paying private mortgage insurance, or PMI, which costs from 0.3% to 1.15% of your home loan.

But here’s some good news for PMI users: You can deduct the interest on this insurance thanks to the Mortgage Insurance Tax Deduction Act of 2019—aka the Setting Every Community Up for Retirement Enhancement (SECURE) Act—which reinstated certain deductions and credits for homeowners.

“These include the deduction for PMI,” says Laura Fogel, certified public accountant at Gonzalez and Associates in Massachusetts. (This credit is retroactive, so talk to your accountant to see if it makes sense to amend your 2018 or 2019 tax return in case you missed it in past years.)

Also note that this tax deduction is set to expire again after 2020 unless Congress decides to extend it in 2021.

Why it’s important: The PMI interest deduction is also an itemized deduction. But if you can take it, it might help push you over the $24,800 standard deduction for married couples under 65. And here’s how much you’ll save: If you make $100,000 and put down 5% on a $200,000 house, you’ll pay about $1,500 in annual PMI premiums and thus cut your taxable income by $1,500. Nice!

Tax break 4: Energy efficiency upgrades

The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy upgrades in a home. Most of these tax credits expired after December 2016; however, two credits are still around (but not for long). The credits for solar electric and solar water-heating equipment are available through Dec. 31, 2021, says Josh Zimmelman, owner of Westwood Tax & Consulting, a New York–based accounting firm.

The SECURE Act also retroactively reinstated a $500 deduction for certain qualified energy-efficient upgrades “such as exterior windows, doors, and insulation,” says Fogel.

Why it’s important: You can still save a tidy sum on your solar energy. And—bonus!—this is a credit, so no worrying about itemizing here. However, the percentage of the credit varies based on the date of installation. For equipment installed between Jan. 1, 2020, and Dec. 31, 2020, 26% of the expenditure is eligible for the credit (down from 30% in 2019). That figure drops to 22% for installation between Jan. 1 and Dec. 31, 2021. As of now, the credit ends entirely after 2021.

Tax break 5: A home office

Good news for all self-employed people whose home office is the main place where they work: You can deduct $5 per square foot, up to 300 square feet, of office space, which amounts to a maximum deduction of $1,500.

For those who can take the deduction, understand that there are very strict rules on what constitutes a dedicated, fully deductible home office space. Here’s more on the much-misunderstood home office tax deduction.

The fine print: The bad news for everyone forced to work at home due to COVID-19? Unfortunately, if you are a W-2 employee, you’re not eligible for the home office deduction under the CARES Act even if you spent most of 2020 in your home office.

Tax break 6: Home improvements to age in place

To get this break, these home improvements will need to exceed 7.5% of your adjusted gross income. So if you make $60,000, this deduction kicks in only on money spent over $4,500.

The cost of these improvements can result in a nice tax break for many older homeowners who plan to age in place and add renovations such as wheelchair ramps or grab bars in bathrooms. Deductible improvements might also include widening doorways, lowering cabinets or electrical fixtures, and adding stair lifts.

The fine print: You’ll need a letter from your doctor to prove these changes were medically necessary.

Tax break 7: Interest on a home equity line of credit

If you have a home equity line of credit, or HELOC, the interest you pay on that loan is deductible only if that loan is used specifically to “buy, build, or improve a property,” according to the IRS. So you’ll save cash if your home’s crying out for a kitchen overhaul or half-bath. But you can’t use your home as a piggy bank to pay for college or throw a wedding.

The fine print: You can deduct only up to the $750,000 cap, and this is for the amount you pay in interest on your HELOC and mortgage combined. (And if you took out a HELOC before the new 2018 tax plan for anything besides improvements to your home, you cannot legally deduct the interest.)

For more smart financial news and advice, head over to MarketWatch.

Source: realtor.com

Standard vs. Itemized Deduction: Which One Should You Take?

Standard versus itemized deduction: Which one should you claim? This question may be weighing heavily on your mind as you prepare to file your taxes. Especially since the standard deduction once again changed in 2020, the final change to the new tax reforms that took effect in 2018. So let this guide help you decide which deduction is best for you.

Itemizing your deductions—particularly if you’ve bought a home recently—could save you major bucks when you file. But, more than ever, you need to understand what you can and can’t do tax-wise. We’ll break it down to help you make the decision on whether to select a standard or an itemized deduction.

What is the standard deduction?

The standard deduction is essentially a flat-dollar, no-questions-asked reduction to your adjusted gross income. When you file your tax return, you can deduct a certain amount right off the bat from your taxable income.

The standard deduction nearly doubled as a result of the Tax Cuts and Jobs Act, which went into effect in 2018. For 2020, the standard deduction went up once again for everybody. It is now $12,400 for single filers and $24,800 for married couples filing jointly. (Take note that the rates will jump again in 2021.)

Here are some of the benefits to taking a standard deduction:

  • It allows you a deduction even if you have no expenses that qualify as itemized deductions.
  • It eliminates the need to keep records and receipts of your expenses in case you’re audited by the IRS.
  • It lets you avoid having to track medical expenses, charitable donations, and other itemizable deductions throughout the year.
  • It saves you the trouble of needing to understand the fine nuances of tax law.

What are itemized deductions?

Although claiming the standard deduction is easy and convenient, choosing to itemize can potentially save you thousands of dollars, says Mark Steber, chief tax officer at the Jackson Hewitt tax service.

“Don’t be lulled into thinking the standard deduction is always a better answer,” Steber says. That advice especially applies to homeowners.

“Buying a home has the single largest impact on your tax return,” he adds, noting that a home purchase is “an anchor item that can move someone into the itemized taxpayer category.”

Itemizing your deductions may enable you to deduct these expenses:

  • Home mortgage interest (note the exceptions below)
  • Real estate and personal property taxes (note the cap below)
  • State and local income taxes or sales taxes (but not both)
  • Gifts to charities
  • Casualty or theft losses
  • Unreimbursed medical and dental expenses
  • Unreimbursed employee business expenses

Why itemizing often makes sense for homeowners

Under the new law, current homeowners can continue to deduct interest on a total of $1 million of mortgage debt for a first and second home that was bought before December 16, 2017. But buyers who purchased a home after that date can still deduct interest, but the amount drops to $750,000 for a first and second home.

It’s still possible that if you own a home, your mortgage interest alone might exceed the standard deduction, says Steve Albert, director of tax services at the CPA wealth management firm Glass Jacobson. In this case, it’s a no-brainer to itemize your deductions.

This is particularly true if you bought a house recently, since most mortgages are front-loaded to pay mortgage interest rather than whittle down the principal (which is the amount you borrowed).

For instance: If you have a 30-year loan for $400,000 at a fixed 5% interest rate, in the first year of your mortgage, you’ll pay off only $5,901 in principal and a whopping $19,866 in interest.

That alone exceeds an individual’s standard deduction of $12,400 deduction for 2020. So if you’re filing taxes this year, itemizing would make total sense.

Plus: If you bought your house in 2020 and paid points—which are essentially a way to prepay interest upfront to lower your monthly mortgage bills—these points count as mortgage interest, too, amounting to more tax savings.

On the other hand, if you’ve owned your home for a while, then your mortgage interest may not amount to much. By the 25th year of that same $400,000 loan, you’ll pay only $6,223 in interest.

However, keep in mind that your property taxes of up to $10,000 are an itemized deduction, too—and combined with mortgage interest and other deductions, could push you over the top into itemizing territory.

Itemized vs. standard deduction: Which is right for you?

Not sure how much you paid in mortgage interest and property taxes last year? To get a ballpark, you can punch your info into an online mortgage calculator.

Also, early in the new year, your mortgage lender should have mailed you a mortgage interest statement (Form 1098) showing the total you paid during the previous year.

“And if you had your property taxes impounded in your loan, your taxes will appear on your 1098 as well,” says Lisa Greene-Lewis, a CPA and tax expert at TurboTax.

Another DIY approach for seeing whether your combined itemized tax deductions are higher than your standard tax deduction is to fill out the IRS Schedule A form, which outlines all federal itemized deductions line by line.

You can also consult an accountant (you can search for a tax professional in your area using the IRS directory of tax return preparers). But as a general rule, if you bought a home recently, you could be a prime candidate for itemizing, so don’t let these potential savings pass you by without checking!

For more smart financial news and advice, head over to MarketWatch.

Source: realtor.com