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Being able to deduct state and local property taxes from your federal income taxes has long been a big bonus of homeownership.
However, due to the Tax Cuts and Jobs Act of 2017, you may no longer be able to deduct all the property taxes you pay from your federal income taxes.
When the Revenue Act of 1913 created the modern system for taxing income at the federal level, it contained a provision allowing taxpayers to deduct state, county, school and other local taxes they paid from their federal income taxes. Prior to the tax reform law passed at the end of 2017, you could deduct the amount you paid for state, local and foreign income taxes; state, local and foreign real property tax, and state and local personal property taxes. Or you could choose to deduct state and local sales taxes instead of state and local income taxes.
This meant that taxpayers who opted to take this deduction didn’t pay federal income tax on money paid to state, local and foreign governments for income or property taxes — until now.
Impact of tax reform on SALT deduction
The Tax Cuts and Jobs Act of 2017 temporarily capped the deduction for state and local taxes — called the SALT deduction — at $10,000 starting Jan. 1, 2018, and ending on Dec. 31, 2025. It also eliminated the deduction for foreign real property taxes.
If your combined state income taxes, property taxes and other local taxes exceed $10,000 — which can easily happen if you live in a state with high income and property taxes like New York, New Jersey or California — you won’t be able to deduct all you paid, and your 2018 federal tax bill – which is due in April 2019 – could increase.
In 2015, 44 million households claimed the SALT deduction, making this deduction more popular than either the mortgage interest deduction or deduction for charitable donations. While you must itemize to claim the SALT deduction (instead of taking the simpler standard deduction), around 30% of American taxpayers did just that in 2015, deducting state and local taxes on their federal returns.
Since deductions for state tax can reduce the amount of your taxable income, limits on the SALT deduction could mean your taxable income is higher — which in turn can lead to a higher federal income tax bill. However, if you have a high property tax bill, one option might help you offset the impact of the reduced SALT deduction: You could appeal to reduce your property tax assessment.
What does it mean to appeal your property taxes?
When you own a home — or any other type of real estate — you typically have to pay property taxes to a municipality, county or state. Sometimes, more than one governing body will tax your property.
The taxing authority calculates your property taxes based on the assessed value of your home multiplied by your local tax rate. While you probably can’t change your local tax rates, you may be able to challenge the assessment and ask for a reduction in the assessed value of your home.
Generally, taxing authorities set assessed values on homes and other properties within their jurisdiction. They typically employ an assessor, who reviews information about your property, such as sale prices of similar properties in the area, how much it might cost to replace your property, and your costs for maintenance and improvements.
Usually, a home’s assessed value is less than its fair market value (the amount you could reasonably expect to sell the house for in the current market).
If you can get your assessed value on your home reduced, you can lower your property taxes.
Grounds for appeal?
Of course, you can’t just get your property tax assessment reduced because you feel that it’s too high. Typically, you need to be able to demonstrate that your home’s assessed value is too high. Tax reform may give you more reason — and grounds — for appeal.
The cap on the SALT deduction may ultimately reduce home values by 4% nationwide, with bigger drops in value for higher-priced homes, Moody’s Analytics estimates. If home values fall, this could bolster appeal efforts of homeowners most likely to be affected by the new limit on SALT deductions.
Even if property values hold steady, millions of homeowners may still be able to successfully appeal property taxes, thus lowering their tax bills and reducing losses caused by the new limits on the property tax deduction. Researchers from Ball State University Center for Business and Economic Research analyzed assessments in Indiana and found that more homes were over-assessed than under-assessed since the 2008 recession, with low-value residential properties most likely to be over-assessed.
How to appeal property taxes
Every taxing authority sets its own appeals process. However, common steps for appealing property tax assessments can include the following:
- Submitting an appeal by the deadline set by the county. Typically, property owners can appeal by a set date each year or within a limited period of time after purchasing a new home or receiving an assessment for a newly built house. Appeals typically must be submitted in writing and the county often has specific forms to use to submit the appeal.
- Providing grounds for appeal. You’ll need to provide proof your home is over-assessed. This can come in the form of documentation showing recent sales of similar properties or in the form of a current appraisal prepared by a professional appraiser. You could also provide evidence of other reasons your property’s assessed value should be lowered, such as evidence of excessive deterioration of the property.
- Attend a hearing. While some governing authorities adjust your assessment after submission of a written request — provided you have enough documentation to prove your home is assessed higher than other comparable homes in your area — others require you to attend a hearing. If your county doesn’t require a hearing, you’ll usually have the right to request one if your written appeal doesn’t result in your assessment being reduced.
Typically, you don’t have to pay anything to appeal your property tax assessment, although some governing authorities require a fee for data on comparable properties that you can use to demonstrate your property’s fair market value. You’d also need to pay for an appraisal if you want an expert opinion to present as evidence that your assessment should be lowered.
You can hire attorneys or other experts to help with the property tax appeals process if you aren’t comfortable going through the steps yourself. However, the process is typically straightforward. The most important step is to provide solid support for your case.
If the new cap on SALT deductions means you won’t be able to deduct all your property tax in 2018, you still might be able to help defray the cost of your property taxes. Provided you can demonstrate your home’s assessed value is too high, appealing your assessed value may help reduce your property tax bill, which could help offset some of the financial loss resulting from the new cap.
It’s also worth noting that some high-tax states are looking for additional ways to help home-owning taxpayers in those states, such as treating state taxes as charitable contributions. These state governments may or may not succeed; the IRS has announced it plans to issue proposed regulations addressing deductibility of state and local tax payments for federal income tax purposes. And it’s also important to remember that the SALT deduction cap is only temporary — unless the federal government extends the cap or otherwise reforms tax policy between now and Dec. 31, 2025.
A senior product specialist with Credit Karma Tax®, Janet Murphy is a CPA candidate with more than a decade in the tax industry. She’s worked as a tax analyst, tax product development manager and tax accountant. She has accounting degrees and certifications from Clemson University and the U.S. Career Institute. You can find her on LinkedIn.