If you’re thinking about itemizing your taxes, it’s important to understand the benefits and drawbacks. The standard deduction can help you save time and money by reducing your taxable income. But it’s not always the best option for all taxpayers. You might want to consider itemizing if your mortgage interest or property tax payments are higher than what you could deduct with a standard deduction in 2018—or if you have other deductions such as medical expenses, charitable contributions or unreimbursed employee expenses which make up more than two percent of your adjusted gross income (AGI). If so, we recommend consulting a tax professional who can help determine whether filing an itemized return will save more money than using the standard deduction amount would require
In this post, we find out if You Can Deduct Property Taxes With Standard Deduction, how much of your property taxes are tax deductible, can you deduct property taxes if you don’t itemize, and does standard deduction include property tax.
Can You Deduct Property Taxes With Standard Deduction
For the last few years, most Americans have been able to skip the hassle of itemizing their taxes. The standard deduction has increased each year since 2017 and will continue to do so in 2018. Plus, you’re likely eligible for a variety of other tax breaks as well, including credits for childcare expenses and student loan interest payments. But if your total deductions exceed the standard amount in 2018—and especially if they exceed it by a significant amount—then itemizing might be worth your while after all. Here’s what you need to know:
The standard deduction has increased for 2018.
The standard deduction is the amount you can deduct from your income before calculating your tax liability. In other words, it’s an amount of money you are allowed to deduct from your taxable income and not pay taxes on.
The 2018 tax year is the first year that the new tax law will be in effect, so there are some changes to what we’ve previously seen with regards to deductions. The most significant change comes in the form of a higher standard deduction, which means more taxpayers will now take advantage of this benefit than previously did under previous laws.
The current standard deduction amounts are:
- $12,000 if single or married filing separately
- $18,000 if married filing jointly or qualifying widow(er)
You can skip the hassle of itemizing your taxes.
If you’re not sure if itemizing your taxes is worth the hassle, here are some reasons why you may want to consider taking the standard deduction:
- It’s easier. With the standard deduction, you don’t have to keep track of all your expenses or keep receipts. If you don’t have enough write-off items (such as charitable donations), then using the standard deduction would be especially beneficial for you.
- You can use it even if you have a mortgage or student loans. The IRS does allow people who itemize their taxes and also have mortgages or student loans to use the standard deduction when filing their federal income tax returns each year; however, those who take this route must include an explanation as part of their return explaining why they did not elect to itemize instead. This might make sense in certain situations where someone making a large purchase like a car loan has less room for deductions than someone with no debt whatsoever because there isn’t much left over after paying off major expenses like mortgages or student loans each month!
Your property taxes could exceed the standard deduction in 2018.
The standard deduction has increased for 2018. For single filers, it’s now $12,000; if you’re married and filing jointly, it’s $24,000. If you’re looking to deduct property taxes on your tax return, then you’ll have to use the itemized deduction method instead of taking the standard deduction.
If your property taxes are more than your standard deduction amount (whether as a single filer or jointly with your spouse), then claiming a larger standard deduction won’t help since there is no workaround for exceeding those limits on either side of the aisle in this respect. That said, if any portion of your taxable income falls below these thresholds for deductions—and most do—then taking advantage of them may save some money in what otherwise would have been wasted cash spent paying out-of-pocket toward higher bills from state and local governments each year
It’s not always worth itemizing your taxes.
If you’re taking the standard deduction, it’s not worth itemizing your taxes. You can only deduct property taxes if you are itemizing, and even then it’s only up to $10,000 per year. If your total property tax bill for the year is more than that amount, then it’s better for you to take the standard deduction over itemizing and paying higher income tax.
You might also be able to get a better deal on your mortgage interest by using other deductions—namely medical expenses and charitable donations—instead of property taxes when calculating itemized deductions.
how much of your property taxes are tax deductible
If you pay taxes on your personal property and real estate that you own, you payments may be deductible from your federal income tax bill. Most state and local tax authorities calculate property taxes based on the value of the homes located within their areas, and some agencies also tax personal property. If you pay either type of property tax, claiming the tax deduction is a simple matter of itemizing your deductions on Schedule A of Form 1040.
Personal property taxes
Some states, cities and counties assess property taxes on various types of property you own that are used to produce income, such as tools and other equipment. Every local district has its own list of what type of property is taxed and specifies how taxpayers should determine the item’s taxable value.
For example, Miami-Dade County in Florida requires taxpayers to use the fair market value of the property as the taxable value.
Real property taxes
Homeowners who itemize their tax returns can deduct property taxes they pay on their main residence and any other real estate they own.
However, if you agree to pay the seller’s delinquent taxes from an earlier year at the time you close the sale, you are not permitted to deduct them on your tax return. This payment must be treated as part of the cost of buying the home, rather than as a property tax deduction.
Beginning in 2018, the total amount of deductible state and local income taxes, including property taxes, is limited to $10,000 per year.
Non-deductible real property charges
Certain items on your real estate property tax bill may look like taxes but are actually miscellaneous charges that are not deductible. These can include:
You can deduct costs of maintenance and repairs included in your tax bill, however, only if the tax authority itemizes these amounts in your bill.
Taxes paid through escrow accounts
If you pay your real property taxes by depositing money into an escrow account every month as part of your mortgage payment, make sure you don’t treat these payments as your property tax deduction.
Generally, only the amount that the bank or lender actually pays the tax authority during the years is deductible. This amount is often shown on your Form 1098 where it is reported to you and to the Internal Revenue Service (IRS). That’s because, the amount you must pay to an escrow account is adjusted yearly to be as close as possible to the precise amount due, but it’s rarely exactly the same amount.
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can you deduct property taxes if you don’t itemize
When you file a federal income tax return, you have the choice between taking the standard deduction and itemizing your deductions. But after the 2017 Trump tax changes, which nearly doubled the standard deduction, many taxpayers who lowered their tax bill by itemizing deductions could no longer take the same tax breaks. Because of all the tax code changes, many people work with a financial advisor to optimize a tax strategy for their financial goals. Let’s take a look at deductions that you can take without itemizing.
Making Adjustments to Your Income
You can reduce your taxable income by itemizing your deductions. This means that you list expenses that will later be subtracted from your adjusted gross income (AGI). If your expenses throughout the tax year were more than the value of the standard deduction, itemizing is a useful filing strategy to maximize your tax benefits.
However, itemizing isn’t the only way to reduce your income. You can make “adjustments” to your gross income, which are called “above the line” deductions. These are basically extra deductions that reduce the amount of income you have to pay tax on. They’re literally above line 7 on your standard income tax return Form 1040 where you have to write in your AGI. Anyone can claim them, and you don’t need to itemize. Here’s a breakdown of each:
1. Educator Expenses
For your 2021 taxes, which you will file by April 18, 2022, teachers, counselors and principals who aren’t reimbursed for buying supplies can deduct up to $250. If they’re married to another educator and they’re filing jointly, the limit rises to $500. Qualified expenses include books, supplies, computer equipment and software licensing or services, and any other teaching material that you had to buy during the tax year for the development of a course and in the classroom.
To claim the above-the-line deduction for educator expenses, you have to put in at least 900 hours of work in a given tax year. If you’ve taken money from a Coverdell savings account without paying taxes or you’ve received non-taxable funds from a tuition program, you’re required to subtract those amounts from the total number of educator expenses.
To deduct your educator expenses, you will need to fill out Schedule 1. Line 23 of this form allows you to add your educator expenses. Then you can use this amount to calculate your AGI on your 1040 (using line 6 and line 7).
2. Student Loan Interest
If you are paying off your own student loans or your child’s loans, you can get a tax break for up to $2,500 of paid interest. There are some important income limits to know, though. In tax year 2021, the tax break for single filers will completely phase out when their modified adjusted gross income (MAGI) is higher than $85,000, and $170,000 for married couples filing jointly.
Student loan interest counts as an above-the-line deduction on Schedule 1 (line 33) of Form 1040. Note that because figures are adjusted annually for inflation, you should consult the IRS when 2021 tax benefits are updated.
3. HSA Contributions
Taxpayers with a health savings account can get a tax break for contributions they’ve made using after-tax dollars. The catch is that these funds have to pay for qualified health expenses.
Single folks under the age of 55 can deduct up to $3,600 in 2021 and $3,650 in 2022. Those with family coverage can deduct up to $7,200 in 2021 and $7,300 in 2022. Account holders who are age 55 and over get an additional $1,000.
4. IRA Contributions
Your ability to qualify for the traditional IRA deduction depends on your income level. It’s also based on whether you or your spouse has an employer-sponsored retirement plan.
For the 2021 tax year (tax returns due in April 2022), single tax filers and heads of household with a 401(k) or a similar account at work can take the full deduction if their MAGI is under $66,000, and it phases out completely above $76,000.
For the 2022 tax year (tax returns due April 2023), single tax filers and heads of household with a 401(k) or a similar account at work can take the full deduction if their MAGI is under $68,000, and it phases out completely above $78,000.
Once you turn 72, you’re no longer eligible for the IRA deduction. And there’s no deduction for Roth IRA contributions. It’s a good idea to look over the contribution and income limits for IRAs.
5. Self-Employed Retirement Contributions
If you are work for yourself, you can deduct contributions from self-directed retirement plans like SEP-IRAs or SIMPLE IRAs.
The IRS says that employers can deduct up to 25% of an employee’s salary or $58,000 (whichever is less) for SEP-IRA contributions in 2021. That threshold rises to $61,000 in 2022. And, if you’re the sole proprietor or partner of a business, you could deduct your own salary reduction contributions and your own matching or non-elective contributions.
6. Early Withdrawal Penalties
When you withdraw earnings from a certificate of deposit (or another time-deposit account) before it matures, your bank will charge you a fee. Fortunately, you can deduct the full amount of the penalty on Form 1040. You will just need to attach Schedule 1.
7. Alimony Payments
You might be able to write off the alimony payments you’ve made to an ex-spouse as long as your divorce agreement was finalized by the end of 2018. You could lose this deduction if changes to your divorce agreement were made after 2018.
Note that if you get alimony payments from a finalized divorced before 2019 could qualify as income, and as the receiving spouse you will need to report them on your Form 1040. Child support payments, however, are not tax-deductible.
8. Certain Business Expenses
For the most part, employees have to itemize their business expenses using a separate form (Schedule A). But some workers – like performing artists and certain government officials – can simply include them on their income tax returns (line 24 of Schedule 1).
9. Jury Duty Payments
Besides the above-the-line deductions, there are other tax breaks (called write-in adjustments) that you can write in and claim without itemizing. Whatever you earn from jury duty, for instance, counts as a write-in adjustment if you gave that payment to your employer, because the employer paid your salary while you were away on jury duty.
Bottom Line
When you file your federal return, you have to choose between taking the standard deduction or itemizing. The 2017 Trump tax bill nearly doubled the standard deduction, which now prevents taxpayers from itemizing some deductions. You should review the new tax code changes, especially if you usually itemize deductions. (We also took a look at who should itemize under the new tax plan.) Some deductions can still be claimed without itemizing.
does standard deduction include property tax
Rules for the Property Tax Deduction
You can claim a deduction for real property taxes if the tax is uniform—the same rate is applied to all real property in the tax jurisdiction. The revenues raised must benefit the community as a whole or the government. The tax can’t be paid in exchange for any special service or privilege that only you would enjoy.
You must own the property to be able to claim the deduction. The tax isn’t deductible if you pay your mother’s property taxes for her because she is having trouble making ends meet. The tax on her property is not levied on you personally.
You Have To Itemize Your Deductions
You must itemize to take the property tax deduction, and the total of your itemized deductions should be more than the standard deduction you’re entitled to claim for your filing status to make this worth your while. Otherwise, you’ll be taxed on more income than is necessary, jacking up your tax bill rather than reducing it. Property taxes are claimed on Schedule A.
You might want to prepare your tax return both ways to make sure that itemizing is in your best interest because the TCJA nearly doubled standard deductions from what they were in 2017. They’re set at these figures for the 2021 tax year:
Note
The total of all your itemized deductions—including those for money spent on things like medical expenses, charitable contributions, and mortgage interest—should exceed the amount of your standard deduction to make itemization pay off.
The Tax Cuts and Jobs Act Limit
The TCJA limits the amount of property taxes you can claim. It placed a $10,000 cap on deductions for state, local, and property taxes collectively beginning in 2018. This ceiling applies to any income taxes you pay at the state or local level, as well as property taxes. All these taxes fall under the same umbrella.
Note
You no longer get a $12,000 deduction if you spend $6,000 on state income taxes and $6,000 on property taxes, thanks to the TCJA. You can claim $10,000 of these expenses, but the law effectively forces you to leave $2,000 on the table, unclaimed.
The limit is only $5,000 if you’re married but file a separate return, and property taxes for personal foreign real property were eliminated entirely by TCJA.
Property Taxes Paid Through Escrow
You can deduct the property taxes you pay directly to the taxing authority, as well as any paid into an escrow account that is included in your mortgage payments. In the latter case, your mortgage lender pays the taxing authority on your behalf.
Note
You can only deduct the amount that your lender actually pays out for property taxes—the tax assessment—even if you pay more than this into escrow over the course of the year.
When Real Estate Is Sold
Property taxes are usually split between the seller and the buyer when real estate is sold. The IRS provides specific guidance as to how to determine the amount of property taxes allocated to each. The parties would each pay taxes for the portion of the tax year that they owned the home.
Other Charges on Property Tax Bills
Sometimes property tax bills include charges or fees for services or assessments for local benefits. These aren’t deductible as property taxes. Transfer or stamp taxes or assessments made by a homeowner’s association are also not deductible.
Service charges include water service, trash collection services, and other services performed by the government that are related specifically to your property, not to all local properties.
Assessments for local benefits mean charges on your property tax bill that are for “local benefits that tend to increase the value of your property,” according to the IRS. They can include things like street or sidewalk construction, or water and sewer systems. They’re not deductible as property taxes because these expenses can increase the value of your property.
Recordkeeping for the Deduction
Keep copies of your property tax statements and any canceled checks or bank statements to show proof of payment. Also, keep any escrow documents from the time the property was purchased or sold because these may show additional payments of property tax that you can also deduct.
Impact on the Alternative Minimum Tax
The property tax deduction is an adjustment item if you’re liable for the alternative minimum tax, sometimes referred to as the AMT. Property taxes aren’t deductible when calculating the AMT. You must add this deduction back into your taxable income.
Note
Taxpayers who are subject to the AMT will typically find that their property tax deduction results in little or no reduction in their overall federal tax liability.
Year-End Tax Planning Has Changed, Too
Taxpayers used to be able to pre-pay the next installment of their property tax before the end of the year to help boost their itemized deductions in the immediate tax year, but this was eliminated in 2018 with the TCJA. For example, you might have paid your spring property tax installment in December to increase the amount of property tax you paid in the year ending in December and increase the amount of your deduction for that tax year.
Attempts to pre-pay any amount before the TCJA took place prompted the IRS to rule that pre-paid taxes would only be deductible going forward if they had already been assessed by the taxing authority with an official billing statement at the time of payment.