Property taxes are are one of the biggest expenses in our budget. Since property taxes are deductible (if you itemize your deductions [1]), it’s only natural that they have a large impact on income taxes as well.
Every December, as part of our end of year tax planning [2], I like to figure out when we should pay our property taxes to maximize our overall tax benefits.
Should you pay your property taxes this year? Or wait until next year?
When To Pay Your Property Taxes This Year
If you pay your property taxes this year, you get to take your deduction sooner. Here are some of the times when that can be the most valuable move.
You are making more money this year. If you made more money this year, and you know you’ll be in a higher tax bracket [3] this year than you will be next year, your property tax deduction will be worth more this year than it will be next year.
If tax rates go down next year. Similar to the above one, but even if you make the same amount of money this year and next year, do you think tax rates will go down for next year? If so, then your deduction will be worth more this year than next year. I don’t know about you, but I’m willing to bet this will not be the case this year.
You get a discount for early payment. Our vacation home offers a 2% discount on our real estate taxes if we pay them early. The check is in the mail!
Get cash back paying taxes online. If you have a cash back credit card [4] paying 5% right right now, which won’t be paying as much in the new year (I’m thinking about those of you who have 5% AARP cards [5] expiring), it will be more profitable in cash back rewards to pay your property taxes sooner rather than later. Many cities allow you to pay property taxes online [6] with a credit card to earn cash back.
When You Might Want to Wait
If tax rates are going up. If tax rates are going up (either based on a change in the tax rates, or on your ability to earn significantly more next year), your tax deduction could be more valuable in the new year.
When you are subject to AMT. If you are subject to AMT [7], paying your property taxes early isn’t going to help. In fact, property taxes are excluded as a deduction in the AMT world [8], so you will not see any tax benefit paying your property taxes during an AMT year.
Impacts of interest rates. The old rule of thumb used to be based on the time value of money, when everything else was equal: if you found yourself in the lower tax brackets, and you can wait to pay your real estate property tax bill until March or later, wait until next year. Same for the higher tax brackets that could pay in May or later. However, that was back when you could earn a decent interest rate [9] on the money sitting in an account. With our interest rates so low, we currently have to look beyond just the interest rates. I’m keeping it on the list though, because maybe some day this rule will be back in play!
If you decide to wait until next year to pay your property taxes, you don’t have to wait to see the money. You can always lower your withholding on Form W-4 [10].
How to Deduct Property Taxes
Depending on how you use your real estate, your property tax deduction will show up in various places on your tax return:
- For your home: You will need to itemize your deductions on Schedule A [11] to deduct you property taxes. (You are no longer allowed to deduct property taxes without itemizing [12]).
- For your rental: Property taxes for your rental properties are deducted on Schedule E.
- For your vacation home: Depending on how often you use your vacation home, the vacation home tax rules [13] allow you to take your property tax deduction on either Schedule A or Schedule E.
More Thoughts to Consider
Your tax filing status. The above tips might not help if your filing status [14] is going to change. Planning a marriage [15] or divorce for the new year could change your taxes significantly complicating the tax planning for when to pay your property tax bill.
Fighting your assessment. In our area, the tax bill and negotiating your assessment with the property tax assessor are at different times of the year. If you plan to fight your assessment, be sure to look up the dates for your municipality.
Lottery tax credit. If you decide to wait to pay your property tax bill, don’t forget to request your lottery tax credit. In our area, it’s not automatically applied, and you have to file a form to request it. Of course the deadline is different than the tax bill due date, so it’s easy to miss. If you have lottery tax credits in your area, make sure you are getting yours!
Run a projection. Sometimes it easier to figure out just by running a projection both ways. Use the tax calculator [16] to project your taxes with and without your property tax deduction for this year. You’ll be able to see the difference in dollar amounts.
When are you planning to pay your property taxes?