Applying for a homestead tax program is the most effective way for homeowners to create tax savings. Your state and local government may offer this program in the form of a property tax credit program, a property tax exemption program, or both. It is important to note that the name of the program varies by locality. To take advantage of either program, you will need to submit an application with your local tax assessor’s office. If you're unsure how to receive an application or how to contact your local tax office, 211 is a great resource for local and community information.
Gaining access to an application is the first step to creating your property tax savings. The tax savings varies by locality, but the general rules are the same. Let's dive in and learn more about the homestead property tax program.
Pointer 1: The homestead tax exemption should not be confused with the homestead exemption, which is a legal tool used to protect the value of a home in the event of a spouse’s death or used to protect the equity of a home in the event of bankruptcy.
Understanding property taxes
Understanding property taxes is the first step towards learning how the homestead tax program works. Depending on your jurisdiction, property taxes can be levied by your state government, your local government, or both. The rate at which you're taxed is determined by your state and local government. Your property tax rate, along with the assessed value (or market value) of your home, will be used to determine the total amount of property taxes you owe.
You may also see the property taxes under the name millage tax or mill levy. The millage rate is the rate your local and state government uses to calculate your property taxes. To calculate your property tax, your local government multiplies the millage rate (local tax rate) by the assessed value of the home; this value is then divided by 100. The result will be your property tax for the year.
Pointer 2: If you don't agree with the assessed value of your home, in some jurisdictions, like Maryland, you can file an appeal and challenge the assessment.
Here's an example of how this works. Imagine you live in Baltimore, Maryland, and the assessed value of your home is $120,000. For 2021, Baltimore’s millage rate is 2.248. The assessor will multiply your assessed value of $120,000 by 2.248; the product of 269,760 is then divided by 100. The result is 2697.6, which is your property tax assessment by the city.
Baltimoreans are also exposed to state property taxes. The state millage rate is .1120. This rate is also multiplied by the assessed value of $120,000. The product of 13,440 is then divided by 100. The result is 134.4. This value is then added to your local property tax assessment. Your total tax due would be 2832 (2697.6 +134.4). The amount of property tax that you owe could be astronomically reduced if you qualify for the homestead tax exemption.
What is a homestead tax exemption program?
The homestead tax exemption program aims to reduce the amount of property tax homeowners pay on their principal place of residence (i.e., your primary home). Depending on your locality, the exemption works one of three ways:
- By excluding a portion of your home’s value from taxation.
- By limiting the amount of property taxes a homeowner will be accessed (known as the floating-inflation exemption in many jurisdictions).
- By exempting certain categories of homeowners from their property tax obligation. The implementation of the exemption program and the eligibility for the exemption program vary by jurisdiction.
For example, in the state of Ohio, the homestead tax exemption is available to eligible residents who are 65 and older. Eligible applicants may exempt up to $25,000 from the market value of their homes from taxation. Whereas in Idaho, eligible homeowners can exempt up to 50% of the value of the property and up to 1 acre of land from taxation (the maximum exclusion is $100,000). In most jurisdictions, you will only need to apply for the homestead tax exemption once. The exemption will attach to the property until the property is sold or bequeathed, upon which time the new owner will have to apply for a homestead tax exemption.
In addition to the homestead tax exemption program, your state or local government may also offer the homestead property tax credit program.
What is the homestead property tax credit program?
The homestead property tax credit program is generally a dollar-for-dollar reduction in your property tax assessment. While this is the general rule, in some states the homestead property tax credit works to limit the amount of property tax a homeowner is assessed. Once the tax assessor's office calculates the limitation, the taxpayer receives a credit on their property tax bill for the portion of the property taxes they are exempt from paying. In other states, the credit is offered a refund of taxes paid.
For example, the state of Arkansas offers a $375 homestead property tax credit to eligible homeowners. This would be a dollar-for-dollar reduction in the amount of property taxes owed. While the property tax credit is implemented this way in Arkansas, in Maryland, the homestead property tax credit limits the increase in the taxable assessment, and in Minnesota, eligible homeowners are offered a refund of taxes paid. As you can see, this program is not administered uniformly across all states. For this reason, you should contact your local tax department or your tax advisor to learn about eligibility in your jurisdiction.
Pointer 3: In some jurisdictions, if you are a senior citizen and have not timely filed for the property tax credit or the property tax exemption in prior years, your application could be retroactive, and you could potentially receive a refund for property taxes paid in prior years. For example in Montgomery County, Maryland, if you are 70 or older and have not filed in prior years, your application would be retroactive and eligible to be submitted for the prior three years.
Millionacres bottom line
The implementation of the homestead tax credit program and the homestead exemption program varies by jurisdiction. A sharp contrast between the programs cannot be drawn because states do not implement the program uniformly. While the implementation varies, both programs work the same: creating tax savings is the name of the program's game! To learn about your eligibility, contact your local tax department to find out if you can put dollars back into your pocket!