People hate tax, but the government loves it. One of the most significant bills homeowners can't avoid every year is the real estate tax bill. Luckily, we can explore some tax-saving strategies to avoid or defer tax payments.
We all know the Tax Cuts and Jobs Act(TCJA) in 2017 changes lots of rules about how people deduct and file their taxes. Individuals can deduct property tax up to a certain amount in some situations.
Here are some essential tips you should keep in mind before you plan your year-end tax-saving strategy.
The Uniformly Real Estate Tax
The tax bill may contain different items, and not all of them are tax-deductible. The real estate tax can be deductible is the tax assessed uniformly at a rate on all real estate property in a local region. Any special assessment tax or fee is unlikely to be deductible since the special assessment usually increases your property value. Similarly, payment for a particular service or privilege specifically to your real estate property is very unlikely to be deductible.
Itemization Deduction Rather than Standard Deduction
For the tax year of 2020, the standard deduction for a single taxpayer is $12,400, and $24,800 for married filing jointly.
Due to the TCJA, the property taxes limit is up to $10,000($5,000 if married filing separately). The $10,000 cap includes all taxes paid on real estate and personal property on the state and local levels.
Year-end tax strategy: do a simple math to decide to pay the tax bill before year-end or next year
When you receive the real estate tax bill near year-end but due in the spring next year, you may wonder why to pay the large bill earlier?
Do a simple calculation to see if your property tax bill plus other itemized deductions are more significant than your standard deduction. If so, you'd be better off to pay the real estate tax bill due in spring before the year-end to claim your deduction on your Schedule A.
A few final tips
You need to own the real estate to claim such a deduction.
Investment property or rental property is not in the scope of this discussion. If you have rental or investment properties, the deduction is on a different schedule. The rules are different, as well.
You have to receive a definite real estate tax bill from your local government. You can't estimate a number and pay it in advance to claim such a deduction.
IRS provides tax inflation adjustments for tax year 2020
Topic No. 503 Deductible Taxes
About Publication 530, Tax Information for Homeowners
The information provided here is for general information purposes. The examples or numbers are for illustrative purposes only. The information is not intended to construct any tax, legal, finance, accounting, or investment advice. You should consult a qualified tax advisor, CPA, financial planner, investment manager, or any qualified professionals before you make any decision.