The ultimate guide to property tax relief
Taxes are an inevitable part of our lives. In the words of Benjamin Franklin, nothing in this world can be said to be certain, except death and taxes. However, while you cannot avoid taxes altogether, there is a way to reduce them, as a form of tax relief. In fact, there are tax relief companies and advocates that can help guide you on the path of financial redemption. In this article, we will look into what tax relief is and how can it benefit you – all to serve as an introduction for the ultimate guide to property tax relief.
What is Tax Relief?
To put it simply, tax relief is any program or policy initiative designed by the government to reduce the amount of taxes that businesses and individuals need to pay. It is most commonly found in the forms of universal tax cuts and targeted programs that benefit a specific group of taxpayers or further one of the government’s goals.
For example, a tax deduction that provides individuals with a way to deduct certain expenses from their taxes, like a home mortgage interest, comes under the purview of tax relief. Another example is a tax credit, which directly offsets certain expenditures. As for the tax relief programs, perhaps the most “famous” one is the Fresh Start program which allows some delinquent taxpayers some “breathing room” from a tax lien. Of course, there’s the Child Tax Credit, as well, which benefits all American parents. You can also get a tax credit if you purchase an energy-efficient vehicle, as that is tied to the government’s goal of U.S. energy independence.
Then there are the various property tax assistance programs, property tax relief for seniors. To put it simply, tax relief is somewhat of a very broad subject. Instead of figuring out which tax relief options are ideal for you, you should first understand how tax relief works in the first place.
Understanding how tax relief works
The basic premise of tax relief is divided into four categories. A business or an individual can get tax relief by applying for:
- tax exclusion;
- tax deductions;
- tax credits;
- forgiveness of a tax lien (reserved for the most special cases and is not practiced very much).
The U.S. government policy can be interpreted quite well if one is to track the various amendments and additions to the tax federal code over time. For example, the government wants to encourage its citizens to save for their retirement by providing tax-delayed contributions to individual retirement savings accounts. Furthermore, the government discourages early withdrawals from these accounts by imposing tax penalties on early withdrawals. The government can also create a property tax relief program to further their goals for a certain area.
Then there’s the situation with natural disasters. The government provides some form of tax relief to help offset damages to private properties when they declare that area to be hit by a disaster. For example, the victims of the 2018 California wildfires were able to get significant income tax returns for their casualty losses that were not covered by private insurance providers.
To fully understand how the process works, we need to take a look at how tax relief is applied to beneficiaries.
Tax deductions are basically the reduction of taxable income. The most common tax deduction is one for the home mortgage interest. It reduces the taxable income based on the situation and circumstances and often targets specific taxpayers such as those who had their homes damaged or ruined by a natural disaster.
- For example, let’s say that your taxable income for 2021 was $75,000. This means that you are expected to pay about $12,500 in federal income tax. But if you qualify for a $9,000 tax deduction, for example, the total taxable sum is then calculated by the new number. In this case, that would be $75,000 – $9,000 = $66,000. In the end, your federal income tax will decrease to around $10,000.
The specifics of how the tax deductions are formulated vary from person to person, from situation to situation, and from state to state.
A less common form of tax relief is a tax credit. In general, it provides greater savings than tax deductions, and it is directly subtracted from your total amount of tax owed (once all the deductions are made). An example of this is a taxpayer that has finished itemizing their deductions or has taken a standard tax deduction. Let’s say that their total bill amounts to $4,000. If that same taxpayer qualifies for a $1,500 tax credit, the total tax bill will be $2,500.
You may have heard of tax credits by another name, tax incentive. The reason why tax credits are often called by this name is that they reimburse taxpayers for any expenses that the government deems to be worthwhile. A prime example of this in action is the Lifetime Learning Credit and the American Opportunity Tax Credit incentives, which allow people who enroll in postsecondary education programs to get tax credits. There are also cases in which a property tax relief program allowed its entrants to benefit from tax credits.
Tax exclusions classify certain income types as tax-free, or as tax relief, reducing the amount that a taxpayer reports in their gross income. Furthermore, there are times when income that has an exclusion for tax purposes is not even recorded on the return. But in most cases, IRS records this income in one section of the return and deducts it in another section.
An example of this is company-paid health insurance. It is not recorded on an individual tax return, and the company’s employees do not pay income tax for that particular cost. The company, however, does deduct this cost as a running business expense. Tax exclusions are few and far between when it comes to property tax relief, and you may need to look into other types.
Tax debt forgiveness
The rarest form of tax relief is tax debt forgiveness. It is usually found in situations when tax debts are so high that there is no chance of a taxpayer ever paying them off, such as in the Fresh Start program. The way that it works is that the agency provides tax relief arrangements to these individuals and helps them avoid a tax lien. This can be in form of reduced tax amounts over time, a single tax cut, or a reduction of overall tax liability.
Property Tax Relief
As you are certainly familiar with, property taxes can contribute quite heavily to the cost of homeownership. According to the Tax Foundation, depending on your residence, the property tax bill can be anywhere from $300 to well over $10,000. If you find yourself struggling to pay your property taxes, the best thing to do is to see if you are eligible for any sort of property tax relief.
Property taxes are an important source of funding for local governments. They fund key public services and help things run smoothly. However, these same taxes can be a significant burden for some U.S. citizens. American households, on average, spend around $1,700 on property taxes each year. Of course, the collection amounts greatly vary by region.
While the local governments usually manage property taxes rather well, there is some oversight. This is why most states create property tax assistance programs that are there to help ease the property tax burdens for qualifying households.
How does property tax work?
Commonly, the property tax you need to pay each year is based on the assessed value of your household, as well as its location. The local authority usually does the assessment, issue property tax bills, and establish property tax bills under state-established guidelines. In some states, this assessment is on an annual basis, whereas other states vary their assessment frequency. Here’s how the whole process works:
- A government-appointed assessor estimates the home’s market value, compares it to properties that are similar to it, and checks for any land or home improvements.
- Once they complete the assessment, they plug the home value into the corresponding tax formula. Most commonly, this takes a percentage of $ amount of the home’s value and multiplies it with the tax rate at the county level.
Standard property taxes
The property tax bill significantly differs from one region to another. For example, if you are living in Washington D.C, you can expect to pay around $3,600, on average, for your property taxes. Whereas if you live in Alabama, the number is significantly lower, at $550. Property taxes work in tandem with home values and public services. Whenever one rises, the others usually follow suit. Thus, if your home is in a popular location and has a high value, you can expect to pay a higher property tax.
But not every state has the same collection practices. Some states take heavy steps to ensure that property tax rates do not go “out of control”. An example of how they accomplish this is by limiting how much a tax bill can increase in a given year. Or they may implement a standard homestead exemption, which reduces the home’s assessed value directly, without any further input.
When it comes to paying these taxes, there are two main ways to do so:
- If you happen to have a mortgage, the lender can wrap your property tax payment into the monthly mortgage. They then pay the tax bill on your behalf, once it is due.
- In cases that you fully own your home, without any mortgage, you need to pay the property taxes directly to the government.
How can property tax relief help?
Property tax assistance programs are there to release eligible homeowners from paying some of their property tax obligations. In some cases, a full exclusion is possible. How long this exemption lasts varies on your place of residence as well as the reason for the exemption.
The tax relief process is different in every state, even in every county. But what is certain is that you need to meet the eligibility requirements, submit a tax relief application, and provide any documents that may support your request. Here are some of the most common property tax exemptions that can help you reduce or even wave your property tax:
- Tax exemption for veterans
- Tax exemptions for surviving spouses
- Exemptions for blind, disabled, or low-income residents
- Property tax relief for seniors
- Tax exemptions for minor children with deceased parents
Another thing to note is that you need to submit a tax exemption application every year. While some local governments may extend the application deadline, you have a finite amount of time to apply.
How do you apply for property tax relief?
Normally, you will be able to apply for property tax relief online, at your local tax office, or by mail. However, some states and counties have their own call centers where you might acquire more information. The whole process varies from county to county and you will want to check their respective websites for more information. Here’s an example of how the whole process works:
- First, you will need to get hold of an application and check all the requirements. Most local governments have both readily available on their websites.
- What you then want to do is read through the eligibility conditions and carefully consider if you qualify for any form of property tax relief.
- Once that is over, you will need to gather any necessary documentation that the process requires. This also varies from one state to another, as well as on the program you are applying for (e.g. property tax relief for seniors).
- Finally, you need to file the application by the appointed deadline.
After you submit your application, you will also want to ask about the next steps as well as when you might receive a response on the subject.
Influence of COVID-19 on property tax relief
With the spread of COVID-19, many people find themselves in a position without a reliable source of income. These people are financially struggling and most of the time cannot afford to pay their property tax. While, most of the time, the governments are not introducing a new property tax relief program, they do extend deadlines, introduce penalty cancellations, as well as waived fees.
Some states choose to extend the deadlines on property taxes in the wake of the pandemic. While this is not exactly a deduction in your tax obligations, it provides homeowners with additional time to sort out their finances. In most cases, the decision of whether to extend the deadline is in the hands of the individual county. Local governments also may decide to wave fees and penalties in cases of late or delinquent payments.
Depending on where you live, you may be able to apply for a penalty cancellation due to COVID-19. Some states offer their residents to set up a payment plan in case of overdue tax bills due to the pandemic. The best thing to do is to check your county’s website for additional information. In some cases, you will be able to apply for penalty cancellation straight away, depending on where you live. Some states also may stop you from requesting a penalty cancellation before the official tax deadline.
Do note that you will have to explain exactly how coronavirus impacted your ability to pay property taxes, as well as provide all the necessary documentation to support your claims.
Rental real estate income, recordkeeping, and deductions
If you happen to own rental real estate, you will want to be completely aware of your federal tax responsibilities. First, you will need to report all rental income on your tax return, as well as any expenses. These expenses can be eligible for a tax deduction, lowering the amount of taxes you need to pay.
If you pay your taxes with cash, you need to report your rental income on your tax return in the same year. But if you are using an accrual method, you report that income as you earn it, not when you receive it. Likewise, you deduct your expenses when you incur them, not when you pay them. Due to these factors, most individuals choose to pay their taxes with cash, as accounting is considerably easier.
What categorizes as rental income?
Basically, you need to include all money you receive as rent in your gross income. To clarify, rental income constitutes any payment you receive for occupation or use of your property. Needless to say, you need to report rental income for all properties you might have. In addition to the rent payment, there are other items that go inside your rental income. You need to report them in your tax return as well.
For example, advance rent is something that you receive before the use period. You need to include this advance rent in the rental income in the same year you receive it. Regardless of when the property is actually in use or your accounting method. Let’s say that you sign a contract to rent your property for 10 years. Then you receive $5,000 for the first year’s rent and an additional $5,000 for the last year of the lease. This is $10,000 that you need to file as your income for the first year.
Security deposits that you use for final rent payments also fall under the advance rent category. Thus, you will need to include them in your income as soon as you receive them. But if you happen to keep the part, or the entirety, of the security deposit due to your tenant breaking the terms of the lease, you will need to include that amount in your yearly income.
Canceling a lease
Then there’s the payment for canceling a lease. If a tenant pays you to cancel a lease, this is considered to be rent. Therefore, you will need to include this payment in your yearly income regardless of the accounting method.
If a tenant pays any of your expenses, you need to include that in your rental income, too. But you can deduct these expenses if they fall under the deductible rental expenses category. Most commonly, these include depreciation, repair costs, and operating expenses. An example of this is the water and sewage bill that your tenant pays, which they deduct from the normal rent payment. Strictly speaking, the lease might say that the tenant does not need to pay this bill, it is your responsibility. In those cases, you need to include the utility bills that tenants pay as rent payment under rental income.
Property or services as a form of rent
If you receive any services and/or property in lieu of rent money, you need to include them in your rental income. You need to do so by observing the fair market value. Let’s say that your tenant is a painter that offers to paint the entire property in lieu of paying rent for three months. If you happen to accept the offer, your rental income needs to reflect the amount that your tenant would be paying in rent for those three months.
As a rental property owner, what tax deductions am I eligible for?
There are certain expenses that you might be eligible for if you receive a rental income. They may include property tax, operating expenses, mortgage interest, depreciation, as well as repairs. Anything that has to do with necessary expenses to manage, conserve, and maintain your rental property is eligible for deduction. You can consider these to be “ordinary expenses”. Furthermore, you have the right to deduct the costs of materials and supplies that you use to keep your property in optimal condition.
Any expenses that your tenants incur also qualify for deductions, providing they follow the same logic. However, you may not deduct any money that you spend on improvements. To clarify, an improvement to the rental property only includes the betterment of the property, as well as restoration or adaptation for a new use.
What you can do instead is utilize depreciation for all your improvements. This includes filling out Form 4562 to report depreciation beginning in the year your rental property reports rental income, as well as the beginning of any year where you made improvements, restorations, or added any furnishings. Do note that only a percentage of these expenses will be deductible in the same year they were incurred.
Seek out the help of professionals
When it comes to matters as complex and sensitive as property tax relief, it is best to turn to those that possess the knowledge and experience to solve your problems for you. Consumer Opinion Guide understands just how important it is to find the right consultants, which is why our team devotes so much time and resources to finding only those companies best suited to assist the modern-day consumer. For more insights into the world of tax relief or other industries, make sure to read our other articles!