There’s a lot of talk regarding changes to taxes lately, and it’s extremely difficult to determine exactly how they will affect you specifically. One of the things being discussed is repealing the property tax deduction. How would repealing the property tax deduction affect you?
Property Tax Deduction Background
State and local government can impose a tax on property owners. The amount paid currently can be claimed as a tax deduction on the federal income tax form. The taxpayer’s taxable income is reduced by the amount of the deduction, also then reducing the amount of taxes owed.
Would A Repeal of the Property Tax Deduction Affect You?
Homeowners claim property tax paid on Schedule A of the federal income tax form. This means that the deduction is only applicable if a person is itemizing deductions. If you use the standard deduction, the repeal of the property tax deduction would not affect you. If you itemize deductions, a repeal of the property tax would affect you.
Estimating The Effect Of A Repeal
To estimate the effect of repealing the property tax deduction, you will need the following things:
- Last Year’s Tax Return
- Your Current Property Tax Statement
- A Calculator
Once you’ve gathered the needed items, estimate the amount your taxes will increase if the property tax deduction is repealed:
- Find your Adjusted Gross Income (AGI) (line 38 on form 1040)
- Find your total tax paid (line 63 on form 1040)
- Calculate your effective tax rate: Effective tax rate = total tax paid / adjusted gross income
- Calculate your estimated tax increase: Property Tax Amount for current bill * Effective tax rate
Given the following pieces of information for a fictitious person:
- Adjusted Gross Income: $100,000
- Total Tax Paid: $25,000
- Current Year Property Tax Bill: $3000
- Effective tax rate: 25,000 / 100,000 = 0.25 (or 25%)
- Estimated tax increase: 3000 * 0.25 = $750
Our fictitious person would see a tax increase of $750 if the property tax deduction was repealed.
This is a little overly simplified as your state taxes may also be affected along with your AGI, and this tax change certainly won’t be made in a vacuum. But it does give you a good idea as to how a repeal of the property tax deduction may affect you.