# Do property taxes get deducted 100% from the Annual Tax Return or only a fraction of them?

Hi Personal Finance and Money,

My question comes from hearing people say that you should buy a house rather than rent because you can deduct all of your property taxes on you tax return.

# Question

Do property taxes get deducted 100% from the Annual Tax Return or just a fraction of them?

Read the following 2 scenarios to help me understand which one is correct.

# Example 1

Say for example the scenario as follows:

1. I make \$100,000 per year.
2. I pay \$5000 of Property Taxes per Year.

Do I have to deduct the \$5000 Property Taxes from my income? This is (100,000 - 5,000 = 95,000).

If my understanding is like the one shown in the example, then it means that I recover from this \$5000 only a fraction, according to my tax bracket.

...or

# Example 2

Say for example the scenario as follows:

1. I make \$100,000 per year.
2. I pay \$5000 of Property Taxes per Year
3. My final taxes (without taking into account my Property Taxes) say for example I owe \$2000.

....but as I already paid \$5000, \$3,000 should be returned to me.

Which one of the two is correct, Example 1 or Example 2?

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To clarify, your question boils down to, 'Is this a deduction or a credit?' I believe the technical terms are 'Above the line' and 'Below the line.' If you google those terms it should become clearer. – tp9 Jul 4 '12 at 1:31

If your deductions are higher than the standard deduction, you will be able to subtract property taxes from your income. In your example, that means that taxes are computed based on \$95,000. In 2011, the standard deduction varies between \$5,800 (single filer) and \$11,600 (married filing jointly).

Tax credits are subtracted from your tax obligation. The most common tax credit for most people is student loan interest. If you pay \$500 in student loan interest, that sum is subtracted from your tax bill.

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so that means that it works like in Example 1 which means that I will only get a fraction of my paid Property Taxes. – Viriato Jan 14 '12 at 22:51
+1 Duff - at some point, this is an AMT item, so for many, the effect is that property tax produces no change to one's tax bill. i.e. the AMT negates the savings dollar for dollar. Otherwise, you nailed it. – JoeTaxpayer Jan 14 '12 at 22:53
@Viriato - re-read Duff's response, you recover only to the extent all your deductions exceed the standard deduction. \$%k property tax, \$4000 interest, and you'd probably not even itemize. – JoeTaxpayer Jan 14 '12 at 23:35
@JoeTaxpayer I re-read the response and I think I understand it. There is two options: getting standard deduction or do it custom by itemizing everything I can and then I take whatever is gives me more money (or takes less money). But supposing that I am going with the itemized deductions route then it works like I said in Example 1 right? – Viriato Jan 15 '12 at 0:59
@duffbeer703 So I can ONLY subtract property taxes from my total income(salary, bank interest, investment, etc...) if my deductions are higher than the Standard Deduction? What is the relationship between my Property Taxes and (My Deductions and Income)? Is that just the rule? It seems ilogical, if that is the case then Property Taxes are not a "Tax", they are just a bill to pay (like when I buy a TV or a suit). – Viriato Jan 15 '12 at 1:35

In 2012, the standard deduction is \$5950 for a single person. Let's assume you are very charitable, and by coincidence you donate exactly \$5950 to charity.

Everything that falls under itemized deductions would then be deductible.

• Gross Income = \$100,000
• Deductions = \$5950 + \$6000
• Subtotal - \$88,050

Other adjustments come into play, including an exemption of \$3850, I am just showing the effect of the property tax.

The bottom line is that deductions come off income, not off your tax bill. The saving from a deduction is \$\$ x your tax bracket.

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To bring more clarity to the issue, Viriato will be entitle to deduct property tax depending upon whether he is claiming standard deduction (which varies on some factors including filling as married or single) or itemized deduction.

If he is claiming, itemized deduction Example 1 is correct. Example 2 suffers from another mistake. He can get refund of only income tax portion of \$5000 and not \$5000.

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Any deductable expense will reduce your taxable income not your tax payable. Your Example 1 above is correct and gives you 100% deduction.

It is like having a business where your sales are \$100,000 and your expenses in making the sales is \$40,000. The expenses are your tax deductions and reduce your profits on which you pay tax on to \$60,000.

If your Example 2 was correct then the situation above would change that you would pay say \$30,000 tax on \$100,000 sales, then apply your deductions (or expenses) of \$40,000 so that you would pay no tax at all and in fact get \$10,000 back in your return. In this case the government would not be collecting any taxes but paying out returns to everyone. Your Example 2 is absolutly incorrect.

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You ignore the impact of standard deduction. – JoeTaxpayer Jan 15 '12 at 4:16
I am in Australia, and any deduction is deducted from taxable income not from the tax payable, as would be the case for Example 2. We also have tax credits (an example of a tax credit are the franking credits from dividends where the company has already paid tax on the dividends). These tax credits are subtracted directly from the amount of tax payable. – Victor Jan 15 '12 at 4:27
@JoeTaxpayer I already had a feeling that Example two was incorrect, but from the response from duffbeer703 it says that I can only deduct Property Taxes from my Income if my collection of Itemized deductions is higher than what Standard Deduction is. Is that true? What happens if my Itemized Deductions are lower than Standard Deduction? – Viriato Jan 15 '12 at 4:27
Ok. My deductions include Prop Tax, Interest, and State tax. If they add to \$5800 or higher, that's my itemized deduction, if lower, I use the standard \$5800. So, Prop tax is part of the list (of itemized) which is only taken if it's higher than standard 5800/11600 (single/joint). Better? – JoeTaxpayer Jan 15 '12 at 5:09
@viriato - I learn to be a better teacher from those who do as you did, ask until I'm clearly stating a response. So, thank you. – JoeTaxpayer Jan 15 '12 at 5:29

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