High property taxes don’t necessarily mean high overall taxes in an area
Another important point is that just because real estate taxes are high in a certain state or locality doesn’t necessarily mean that it’s a "high-tax" area. Conversely, the absence of high real estate taxes doesn’t automatically mean that a place is tax friendly.
Real estate property taxes are just one piece of the overall tax picture in a state or local area. Some also assess property tax on vehicles, while others don’t, for example. And, this can be rather expensive in some cases. I mentioned that I live in a state with relatively low real estate taxes, but between my wife and I, we paid nearly as much in car taxes last year as we did in real estate property taxes. It’s not that we own particularly fancy vehicles -- our state just has relatively high vehicle taxes. If I consider the combined car and real estate taxes, it’s safe to say that we pay more than many homeowners in states with higher real estate taxes, but no vehicle property taxes.
Alternatively, some states with high property taxes may have relatively low sales taxes, or little or no state income taxes. Some may tax things like Social Security benefits, while others have numerous tax exemptions for retirees. The point is that it’s important to consider all of the potential taxes you have to pay in a certain area.
Are real estate property taxes deductible on your tax return?
Here’s one real estate tax topic that has changed considerably in recent years. While real estate property taxes are still deductible on your federal tax return, the Tax Cuts and Jobs Act limited the deduction in a way that disproportionately affects people in high-tax states.
Starting with the 2018 tax year, the deduction for state and local taxes (also known as the SALT deduction) is limited to $10,000 per year, per return. This includes your property taxes as well as your state income or sales taxes paid each year. If you’re in a high-tax state, the income tax portion alone can easily eat up the entire $10,000 limit.
What’s more, the standard deduction was roughly doubled. For 2019, it is now $12,200 for single taxpayers and married couples filing separately, $24,400 for married taxpayers filing a joint return, and $18,350 for heads of household. So, unless you have enough itemizable deductions in addition to the $10,000 maximum SALT deduction to push your total over the applicable standard deduction, it isn’t worthwhile to use the SALT deduction at all.
The bottom line is that while the deduction for real estate property taxes still exists, the vast majority of U.S. taxpayers aren’t able to benefit from it.
Property taxes (and the laws involving them) change over time
As a final thought, it’s important to emphasize that the information discussed here can change over time. Your property taxes will generally adjust with market conditions as well as state and local expenses each year. Just because you live in a low-tax state now doesn’t necessarily mean that your state will remain low-tax in the future, and the same can be said for high-tax states. And just because the SALT deduction recently changed doesn’t mean the new one will remain forever. The point is that this is a snapshot of U.S. property taxes and their tax treatment in 2019, and the information is likely to evolve over time.