For homeowners, property taxes can seem like a burden that is set in stone, but that might not be entirely true.
In today’s post, I’ll outline how property taxes are calculated, and I’ll also give you some tips that could help you reduce your property tax bill.
How are property taxes calculated?
As you probably know, property taxes are typically administered and collected at the local government level, so this means that jurisdictions like cities, counties, or school districts are responsible for determining how much you owe.
To calculate your property tax bill, local government entities first calculate the value of your property and then apply their tax rate to that amount. Here’s the general breakdown:
- Assessed Value: Typically, the local tax assessor determines the assessed value of your home by looking at factors like size, location, and age. They’ll also “run comps,” which means they will look at the sale price of comparable homes in your area to determine how much yours is worth. The number they end up with is called the assessed value or market value of your property, and this is around the same amount you would use to list your house if you were going to sell it.
- Exemptions, Deductions, and Credits: Just like with income taxes, most places offer exemptions, deductions, and credits that you can use to lower your property tax bill. For instance, you may qualify for a homeowners exemption if the property is your primary residence, or you may qualify for deductions available for seniors, veterans, or people with disabilities. Your local tax assessor’s office will have more information on what’s available (I’ll talk more about this in a minute, too).
- Rates and Caps: Most areas will also have some sort of calculation or rate that they will use to determine how much you owe for property taxes. This rate is used to calculate how much you owe after any exemptions or deductions are applied to your property’s assessed value. Additionally, some places will cap or limit the tax at a certain percentage of your property’s assessed value, and some places even limit the total amount that a jurisdiction can collect from all of the properties in that area. Generally speaking, here’s how these rates or caps work:
- Assessment Ratio: In some places, the tax assessor won’t use the full market value of the property but will instead apply an “assessment ratio” to determine how much you owe in property taxes. For example, if your property is assessed to be worth $400,000 and your tax assessor uses an assessment ratio of 80%, then only $320,000 will be used to calculate your property taxes.
- Millage Rate: Many states use a millage rate to calculate property tax bills. The millage rate or “mill rate” is the rate applied to your property’s assessed value to determine your property tax bill. One mill is equivalent to $1 in property tax per $1,000 of a property’s assessed value. To calculate using a mill rate, you multiply the mill rate by the assessed value of the property and then divide that number by 1,000. For instance, if your home is valued at $400,000 and the mill rate is 8 mills, you’d multiply 8 x 400,000 to get 3,200,000 and then divide that by 1,000 to end up with a $3,200 property tax bill.
- Tax Rate: Some states don’t use a millage rate but use a similar rate to calculate the property taxes owed. You should check with your local tax assessor’s office to find the rate for your property.
- Tax Cap, Circuit Breaker, or Tax Levy: Some areas set a tax cap for each local taxing authority. This is sometimes called a circuit breaker cap or a tax levy. No matter what it’s called in your area, it means that there is a specific amount of dollars that each city, town, township, or other type of jurisdiction can seek to collect each year. Because the cap is distributed amongst the properties in that jurisdiction, the limit can result in a lower tax bill. What typically happens is that once all of the tax bills are calculated, if the limit has been reached, a credit will be applied to each property owner’s tax liability by applying a percentage rate so that the credit is proportional to the property’s assessment.
How can I lower my property tax bill?
The first step in determining if you can potentially lower your property tax bill is to find your property record card. Many places make these available for free online through your tax assessor’s website, but if you don’t see it there, just contact them and ask how you can get a copy.
Next, you should review the information on your property tax card, and then see if you can take any of these steps to lower your property tax bill:
- Challenge Your Assessment: Because the way property taxes are calculated is tied directly to your property’s assessed value, if you think an error has been made or that your property has been overvalued, you can challenge the assessed value by filing an appeal. You’ll need to check with your local tax assessor to see how you can appeal the assessment, but typically it starts with filing simple paperwork to explain why you disagree with your property’s assessed value. In addition to an overvaluation, you could challenge the assessment based on:
- The denial or omission of a deduction, credit, exemption, abatement, or tax cap.
- A clerical, mathematical, or typographical error.
- An error in the property’s description, such as the wrong square footage or number of bedrooms.
- Apply for Exemptions, Deductions, and Credits: Double check with your local tax authority’s office to make sure you haven’t missed out on applying for any tax exemptions, deductions, or credits that you’re entitled to. Some common examples include:
- Exemptions: Sometimes a taxing authority will give an exemption, which is a full or partial waiver of the property tax liability. Exemptions are usually only available for specific types of organizations such as non-profit or religious organizations.
- Deductions: A deduction is an amount that can be subtracted from the assessed property value before the tax calculation takes place. The most common deductions are:
- Homestead Deduction: if the property is your primary residence
- Mortgage Deduction: if you have a mortgage on your property
- Deduction for Veterans
- Deduction for People with Disabilities
- Deduction for Seniors
- Deduction for Historic Property
- Deduction for Energy Efficiency: if you have wind, solar, hydroelectric, or geothermal devices installed on the property
- Credits: A credit is an amount that can be subtracted from your tax bill after the tax calculation takes place. Common property tax credits include the tax cap or circuit breaker credit that I discussed above and credits for installing energy efficiency equipment on the property.
- Apply for Tax Deferral Programs: Some jurisdictions have property tax deferral programs for seniors or homeowners with lower incomes. These programs allow you to postpone paying property taxes until you sell the property or transfer ownership.
How are property taxes different from other types of taxes?
- Local: Unlike income tax and sales tax, property taxes are local taxes.
- Funding: One of the reasons property taxes can vary greatly is because they help fund local services like schools, police, and fire departments.
- Ownership: Unlike other types of taxes, property taxes are tied to ownership.
Final Thoughts
Just like when calculating income taxes, you want to be sure you’re not missing out on any deductions or credits you can use to lower your tax bill.
Additionally, if you take a home office deduction on your income taxes, you can deduct property taxes when using the regular calculation method. Consult with an accountant if you have questions about that calculation.
Just remember that when it comes to any kind of taxes, staying proactive and informed can help you keep as much of your hard-earned money as possible.
