What Is the Property Tax Deduction and How do I Claim It?

When you own property, such as a car, a house, or land, you have to pay annual property taxes to your state or local government, depending on the value of your property. However, you may be able to claim a property tax deduction from your federal income tax bill. 

This article will bring you an overview of the property tax deduction and how to claim it. 

What is the property tax deduction?

Property taxes are paid on property owned by an individual or other legal entity (such as an LLC or a corporation) to the state and local tax authority of the property’s jurisdiction. These taxes are generally used to fund public services such as schools, roadways, libraries, and first responders.

Property taxes are virtually always levied on several types of property, and each state, county, and municipality sets the taxable value for each item.

Common examples of property taxes are mortgage interest, state and municipal taxes on property investments such as homes, land, or apartments, and taxes collected on personal property such as boats or vehicles.

What is deductible

The IRS accepts the following items as property tax deductions: 

  • Your primary house
  • Houses for vacationing
  • Apartment in a cooperative (see IRS Publication 530 for special rules)
  • Land
  • Cars, boats, RVs, and other types of vehicles

What is non-deductible

Certain items on your real estate property tax bill may look like taxes but are actually miscellaneous charges and are not deductible. These are the following: 

  • Taxes on properties you don’t own
  • Property taxes you haven’t paid yet
  • Transfer taxes when you sell your properties
  • Expenses for public services, such as water or garbage collection.
  • Renovation expenses to your home (even if they add value to your property)
  • Payments on loans for energy-efficient house upgrades. (However, you may be able to deduct the interest component of your payment as home mortgage interest.)
  • Property taxes plus government and county tax payments or state taxes totaling over $10,000 ($5,000 for married filing status).
  • Local benefit taxes for constructing streets, walkways, or sanitary sewer infrastructure in your neighborhood. (However, taxes on the maintenance or repair of these items are deductible)

FYI: You can deduct your maintenance and repair expenses; however, only if the tax authority itemizes these amounts in your bill.

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How to claim your property tax deduction

Store your tax documents properly 

If you pay taxes on your properties, you may be able to deduct this sum from your income tax. However, you need to be extra accurate when estimating your property taxes for the year. A simple practice to achieve your goal of claiming a property tax deduction is to keep a copy of your property documentation. 

For example, though your local taxing authority can give you a copy of your property taxable income, you should also keep the licensing documentation for your car, boat, or other mobile assets. If you have a home mortgage, require a 1098 Form from your mortgage company to state how much property tax you paid. And lastly, if you pay your taxes with a check, make sure you keep the bank statement showing how much you paid.

Use Schedule A to file your property taxes

Schedule A is used by the IRS to file taxes on a federal income tax filing. In this file, you should specifically categorize your deductions for property taxes. This form itself is where taxpayers keep track of their write-offs and any property taxes they want to deduct. Filers can also deduct expenses of monthly mortgage interest they paid throughout the tax year using this form.

Subtract your property taxes in the year you pay them. 

This may sound simple, but don’t let it fool you. Property taxes are normally paid in one of two ways: by writing a check once or twice a year when the bill arrives or by setting away money each month in an escrow account while paying the mortgage. Don’t rely on the second way; you should only deduct the taxes you paid during the year.

The bottom line

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Qualified Business Income Deduction And Who Is Eligible?

The qualified business income deduction (QBI) is a tax break that allows self-employed and small-company owners to deduct up to 20% of their qualified business income from their taxable income.

What is a qualified business income deduction?

At the end of 2017, the Tax Cuts and Jobs Act formed a new business deduction known as the qualified business income deduction

What is the qualified business income deduction for?

This deduction is intended to lower the tax rate for pass-through entities and sole proprietorships

One of the Tax Cuts and Jobs Act’s main goals was to lower the corporate tax rate for C corporations, which was reduced from a top rate of 35% to a flat rate of 21%. However, the bulk of American businesses that are not constituted as C corporations do not benefit from a drop in the corporate tax rate. 

As a result, the qualified business income deduction was introduced to help pass-through enterprises and sole proprietorships decrease their effective tax rate.

Who is eligible for the deduction?

Business income 

To begin, you must have a source of business income. For this deduction, most income from a pass-through company, such as a partnership or an S corporation, is deductible, as is income from a sole proprietorship, which you report on Schedule C of your Form 1040.

Taxable income 

Second, you can determine what to do next by considering your taxable income, calculated prior to applying this deduction. You can get the deduction of 20% the lesser of your business income or 20% of your taxable income over your net capital gain if your taxable income is below a particular threshold amount, which is a defined dollar figure adjusted annually for inflation.

If your taxable income is above the threshold amount, then you can try taking two additional criteria.

The first criterion is based on your job or the source of your income. If your business income comes from a “specified service business,” you can’t use the deduction. 

What is a “specific service business”? It can be defined as a business that deals with health, legal, accounting, actuarial science, the performing arts, consultancy, athletics, financial services, or brokerage services.

For instance, if you are a doctor, a lawyer, or an accountant, and your income is over the threshold amount, you will not be eligible for this deduction. However, if your income is below the threshold, this restriction will not apply to you, and you will be able to claim the deduction. You may be entitled to a partial deduction if your income falls between the threshold and the phase-out amount.

The second criterion for taxpayers having taxable income above the threshold level is the qualifying wages and qualifying investment criterion.

Because the purpose of the deduction was to encourage business growth and job creation, a taxpayer’s ability to claim the credit is limited by one of two additional criteria. The taxpayer can choose to use either of these two criteria and will take whichever one results in a larger deduction for them.

The first criterion is that the limitation of the deduction is set to 50 percent of W-2 wages paid to the business’ employees. 

However, if the business does not have employees, the owner can choose to use the alternative test which has the deduction’s limitation of 25 percent of the W-2 wages paid to employees, plus 2.5 percent of the business assest’ cost. 

To sum up, the qualified business deduction is determined at 20 percent times the lesser of the two criteria – qualified business income or taxable income. 

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