It's really easy to forget to deduct your property taxes from your tax return. The reason is that most of us have the mortgage company escrow taxes and insurance payments. This means that the taxes and insurance are included in the monthly mortgage payment. It's not something that is generally paid separately, thus easy to forget each time you write the tax check. (For more on property tax, read Your Property Tax Assessment: What Does It Mean?)
TUTORIAL: Personal Income Tax Guide
Your mortgage company is required by law to send you an annual mortgage statement. This statement will clearly indicate the amount of real estate taxes you have paid for the year. It's important to remember not to deduct the total amount you have paid into escrow for the year. It isn't all deductible, so be certain just to deduct real estate taxes paid. If you just bought your home, remember to include the property taxes you paid in advance, listed on the settlement or closing statement. IRS Schedule A, Line 6 is where you list your property tax deductions. (For more on taxes, check out Taxes: Who Pays And How Much?)
In addition, it's critical to remember that not all charges that appear to be taxes from a governmental authority are deductible. Here is a brief list of fees that are not deductible.
- Amounts paid for local benefits that can increase the value of your home. This means taxes charged directly for the construction of your street, sidewalk, sewer or water systems. Ask yourself if the tax directly went to a construction or improvement project that may result in your home's value increasing. If so, this tax is not a deductible real estate tax. It can sometimes be a little tricky determining whether or not these local benefit charges are deductible. As with all taxation issues, consulting a tax professional is the wisest course of action.
- A flat charge from your local government for a single service. This means if the local government decides to hit you with a charge for a one-time service, it's not a tax-deductible expense. For example, if you are on vacation and forget to cut your grass, and your neighbor complains that the grass has grown higher than the municipality allows. The municipality sends over workers to trim your lawn and keep it within the local ordinances, and then sends you a bill for $55. This bill is considered a flat charge for a single service, and therefore is not deductible.
- Charges for residential services. Think trash collection and other services provided by the government for your home. These service fees are simply not deductible as property taxes. Some things are questionable; therefore, it's always best to consult a tax professional first.
- A unit fee for the delivery of a service. This refers to water, electricity, gas or whatever else the municipality may deliver per unit to your home.
The Bottom Line
It's often overlooked, but property taxes are deductible and your taxes and insurance are included in your monthly mortgage payment. Your mortgage company is required by law to send you an annual mortgage statement. It's not all deductible though, so make sure you only deduct real estate taxes paid.