Property Tax Deductions
People that purchase and own real estate are responsible for paying property taxes. Municipal governments levy these taxes as a means to raise revenue for providing local services. To counter these outflows, Federal and State tax authorities offer property tax deductions. The property tax deduction is designed to encourage home ownership and business investment.
The property tax deduction generally extends over all individuals and business entities that purchase American real estate. Private individuals may deduct property taxes on their principal residences and vacation homes. For business concerns and real estate investors, property taxes are deductible expenses that reduce business expenses.
Lenders that manage mortgage escrow accounts on your behalf prepare Internal Revenue Service (IRS) 1098 forms to summarize any mortgage interest and property tax payments made throughout the tax year. People and businesses that submit property tax payments directly to municipal treasuries must review banking records to calculate their total allotments.
From there, individual homeowners will itemize their property taxes with Schedule A. Schedule A adds up all itemized deductions, before they are included on the 1040 form to help calculate your taxable income. Individual filers may opt to either itemize, or take the standard deduction from their taxable income. For the 2010 tax year, single filers have a $6,100 standard deduction, while married couples may take the $12,200 standard deduction. Verify that your total itemized deductions for property and state taxes, alongside charitable donations exceed the standard deduction before proceeding.
For real estate investments, sole proprietors and partners will file Schedule E to deduct property taxes from their housing-related income. Corporations, however, complete Form 1120 to document property tax expenses.
Be advised that tax law shifts over time, according to prevailing economic conditions and political sentiment. In 2009, single and married taxpayers that chose not to itemize could add $500 or $1,000 to their respective standard deduction amount. This standard deduction addition, however, has already expired heading into the 2010 tax year.
State Tax Deductions
State tax laws allow residents to deduct property taxes at varying levels. In California, all property taxes may be itemized as part of Schedule CA. Other states generally restrict property tax deductions to primary residences and business real estate located within their particular state.
Alternative Minimum Tax
Filers that itemize property tax deductions may trigger the alternative minimum tax (AMT). AMT is a parallel tax code, which was originally introduced as part of the Tax Reform Act of 1969 to prevent wealthy households from legally avoiding all tax bills through deductions. Alternative minimum tax provisions have not been adjusted for inflation, and therefore target many of today’s middle class households. Complete Form 6251 to determine whether you must pay higher taxes due to AMT.