Property taxes, the annual financial obligation dreaded by many, are in fact the lifeblood of the local community services we all rely on. These taxes amassed by cities, counties and school districts within their respective boundaries fund the requisite services. Indeed, the better valued your property, the more you contribute to the tax pool, with millions of homeowners across the nation doing so annually.
The type of property you possess also determines the tax you pay. For instance, a vacant plot may face lower taxation than equivalent land with improvements. However, better accessibility to utilities like sewerage, water, and gas may inflate the land's assessment, leading to higher tax.
City and county governments largely depend on property taxes as crucial revenue streams. Meetings held by boards, councils, and legislatures decide suitable rates, with budget hearings being used to determine cost allocation for various community services, such as education, recreation, and emergency services.
In 2018, the Tax Cuts and Jobs Act (TCJA) capped the federal tax deduction for state and local taxes (SALT) paid at $10,000 per year. However, the American Families and Jobs Act, introduced in 2023, envisages repealing or adjusting this limit before its expiration in 2025.
The computation of property taxes is not as labyrinthine as it seems, involving the city and school district within which a property sits determining the overall rate, known as the mill levy. Each mill equates to one-tenth of one cent, i.e., $1 for each $1,000 of assessed property value. For example, if a county with total property value of $100 million required $1 million for operations, the mill levy would be 1%. Summing this with city and school mill levies of 0.5% and 3% respectively, the total mill levy becomes 4.5%.
The calculation of property taxes is a two-step process: Assessment of the property's value, followed by multiplication of this value by the assessment rate, varying by jurisdiction. The assessor then multiplies the assessed value by the mill levy to compute due property taxes.
Assessors estimate the property value based on sales of comparable properties under prevailing market conditions, possibly making adjustments for property enhancements. An assessment could factor in replacement costs, depreciation, maintenance and construction costs, as well as potential rental income from the property.
Once deemed accurate, the assessor forwards the assessed value to the owner followed by the tax bill. Property owners are generally handed their assessment along with property valuation annually or every five years, depending on the municipal rules. The exact amount due can be ascertained on the assessor’s website or in their office.
Seeing higher tax rates compared to your neighbors? It might be due to a higher assessed value of your home, which could stem from factors like a larger plot of land, a bigger residence, or favorable features. Sometimes different jurisdictions might even come into play.
According to the Tax Foundation’s 2022 data, the average effective property tax rate in the US stood at 1.08%. New Jersey clocked the highest rate at 2.21%, while Hawaii sported the lowest at 0.31%, trailed closely by Alabama and Louisiana. Meanwhile, property tax exemptions may be available for certain demographics in some states, such as veterans, elderly homeowners, individuals with disabilities or households with renewable energy installations.
To ensure appropriate payment of property taxes, homeowners should stay aware of how these are calculated, where to find this information, and the timing of the billing cycle. Many cities now offer the laxity of viewing and paying bills online. In essence, understanding the mechanics of property tax ensures homeowners are well-versed about their obligations, keeping them accountable in their contributions towards local community prosperity.