Itemized Deductions for Property Taxes on Personal Residences

The TCJA includes a provision that replaces the allowable amount for itemized deductions on From 1040's Schedule A for payments of property taxes on personal residences. Here's a rundown of what's discarded and what's new.

Mar 26th 2020
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These tumultuous tax times are upsetting for my clients, as a consequence of which, they inundate me with questions. 

Many of their queries concern whether they will be helped or hurt this year by Public Law No. 115-97, aka the Tax Cuts and Jobs Act (TCJA), that Congress passed and President Trump signed on December 23, 2017. Both supporters and opponents of the TCJA consider it to be the most comprehensive overhaul of the Internal Revenue Code since President Reagan signed the historic Tax Reform Act of 1986.

What prompts this column? The TCJA includes a provision that replaces the allowable amount for itemized deductions on From 1040's Schedule A for payments of property taxes on personal residences. Here's a rundown of what's discarded and what's new.

The old rules for 2017 and previous years. They impose no limit, though there's a limited exception for payments that run afoul of the alternative minimum tax, which disallows all itemized deductions for state and local income taxes and property taxes.

The new rules for 2018 through 2025. They impose a ceiling on write-offs for property taxes. The cap is $10,000 for married couples filing joint returns  and qualifying widows/widowers (surviving spouses who qualify for the same breaks as married couples for two years after a spouse dies) and single individuals. It drops by 50 percent to $5,000 for married couples filing separate returns.

The new rules make no changes to long-standing restrictions on what owners are allowed to deduct for property taxes. There continue to be limitations on which payments qualify, when they're deductible, and how much is allowable. Property owners should be aware of these traps for the unwary.

While the IRS says real estate taxes usually mean any state, local or foreign taxes on real property, it invokes a special rule when a portion of your monthly mortgage payments goes into an escrow account and the mortgage company periodically pays your real estate taxes to local governments out of this account. 

The measure of the allowable deduction: The amount actually paid during the year in question to the taxing authorities. 

Typically, lenders will send year-end statements that show this information.

Another stipulation: The IRS approves deductions only for taxes paid on real estate. It reads the law as requiring the taxes to pass a two-step test.

The first requirement: The taxes must be based on the assessed value of the real property.

The second requirement: The taxing authority charges the assessment at a uniform rate against all property under the authority's jurisdiction. This approach generally forbids deductions when the taxes in question are charged for local benefits and improvements that tend to increase the value of your personal residence.

IRS regulations list the prohibited charges. They include assessments for construction of streets, sidewalks, water mains, sewer lines, public parking facilities, and similar improvements.

But, all is not lost. Those assessments are added to your home's cost basis, IRS lingo for the figure used to determine gain or loss on a later sale.

When does the agency authorize current deductions for local benefit taxes? Only if they're for maintenance or repairs of streets, sidewalks, or other local improvements, or interest charges on such maintenance.

Other verboten deductions: Itemized charges for services. Makes no difference that they are characterized as "taxes."

Some common examples: Unit fees for delivery of services (water consumed), periodic charges for residential services (trash collections), or flat fees for single services provided by your government (charge for mowing your lawn because it was allowed to grow higher than permitted under your local ordinance).

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting). 

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