When it’s tax season, everyone’s thoughts turn to tax deductions. Financial advisors and accountants alike are flooded with calls from frantic clients looking to save money on taxes by finding new deductions or other tax tricks. The most common question by far is, “Is this Deductible?” Remember, this tax season is tricky.
Unfortunately, many tax deductions are either too small to have very much impact on how much taxes you pay, or are too narrowly tailored to actually be a tax deduction that most people can take. Add into the mix the fact that many of the things that people “just know” are tax deductible, actually are not tax deductions until they are higher than a certain “floor”, and most searches for new tax deductible items end in disappointment.
The good news is that some big items are deductible for almost everyone. These are the best tax deductions out there and they are good for high-income taxpayers and lower-income taxpayers alike. These include deducting mortgage interest, many educational expenses, and tax deductions for children, and the related child tax credit. One of the other biggies that can bring tax burden relief is deductible property taxes.
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Deducting Property Taxes on Income Tax Forms
Many people are surprised to find out how much property taxes they pay on real estate, particularly on their primary residence. This is because a large percentage of home owners pay their property taxes via their mortgage loan.
That is, that the mortgage company collects an extra amount of money with each payment which it keeps in an escrow account. Over the year, that extra money adds up to enough cash to cover the amount of property taxes due. If it the escrow account comes up short, the mortgage company fronts the money and then increases the part of the monthly loan payment for escrow.
Even though the mortgage company handles paying the property taxes for you, it does so with your money, which means you are the still the one who paid the property taxes, and therefore, you are the one who gets the property tax deduction. Check the 1098-INT tax form the mortgage company is required to send you each year. Both the amount of mortgage interest paid for the year and the amount of property taxes paid annually should be listed. Enter the amount of interest you can deduct on Line 6 of Schedule A Form 1040 from the IRS.
Don’t forget about other property taxes too! The most common type of property taxes that are deductible, other than real estate property taxes, are the property taxes on cars. Automobile property taxes are deductible if they are computed based upon a percentage of the car’s value. In other words, the taxes that are levied by the state, county, or city that are a variable amount depending on how much the car is worth are deductible. Flat taxes and fees, such as a $25 annual fee, that are the same amount no matter what the car is worth are not deductible.
Keep an eye on the mail for all tax forms, including 1099 Forms for real estate and brokerage and banking accounts. There are important tax numbers on each of these.