Hi gang. I have been getting guidance (read that as emails) from the Franchise Tax Board that next year for California (and I suspect for some other states) that there will be big changes in taking property taxes. If you are one of the approximate five million people who take the property tax deduction on Schedule A, be aware that starting in 2012 you will not be able to deduct the full amount.
Beginning with your 2012 California tax return (next year’s), the state reporting requirements for real estate tax deductions will change. This will include reporting your property parcel number, deductible, and nondeductible amounts. Parcel number should be on your property tax statement. You should keep a copy of your property tax bill(s) to report this information on your return.
I have some clients who do and others who don’t but you will need to have a copy of it to figure out what you can and can’t deduct.
Basically, the rules will be as follows as of now (according to our friends at the Franchise Tax Board):
California law conforms to federal law regarding real estate tax deductions. You should use the same real estate deduction amount(s) on both federal and state tax returns. Don’t guess or try to fudge the numbers. Individuals who itemize deductions can claim deductions for real estate tax on Schedule A of their federal individual income tax return. You are allowed to deduct only the amount of real estate tax paid during the year that is based on the assessed value of your property and that is not for a local benefit that tends to increase
the value of your property. Confusing? Not really.
You cannot deduct any amounts shown on your property tax bill, including special assessments, special taxes, fees, or any charges that are not computed based on the assessed value of your property, regardless of their purpose.
Here are some steps to deduct your correct property tax:
1. Locate your current property tax bill sent by your county’s tax collector. You may need to locate the prior year property tax bill to determine the actual installment(s) paid during the year.
Do not use Federal Form 1098 “Mortgage Interest Statement” to determine the amounts of real estate taxes that are deductible. The amounts reported on Form 1098 reflect the total taxes paid, not the deductible portion.
Fashion tip: You may be able to look up your property tax bill online.
2. I would suggest that you review your property tax bill to determine the deductible and nondeductible amounts.
Deductible – Generally, only the amount based on the assessed value of the taxpayers’ property is deductible. These amounts are commonly referred to as ad valorem or general tax levy on property tax bills. For most counties, the deductible amount is identified on property tax bills as the assessed value multiplied by an associated tax rate percentage.
Note – A few county property tax bills do not show tax rate percentages for items that may be deductible. However, sample property tax bills located on the FTB webpage are enhanced to show the deductible and nondeductible amounts.
Nondeductible – Most property tax bills also include non-ad valorem special assessments, special taxes, Mello-Roos, direct
levies, fees, and charges that are nondeductible. For most counties, these amounts are identified on the tax bills as amounts
that do not include a tax rate percentage.
Fashion tip: Go to the Franchise Tax Board website and see a sample bill.
3. Deduct the deductible amount as an itemized deduction.
Remember that itemized deductions go on Schedule A.
More to come during the year as it develops.
Stay happy, healthy wealthy and wise, friends.
March 27 2012
Kim Isaac Greenblatt
Property Tax and Parcel Issues for 2012 for Californians and Other States