Are City Property Taxes Deductible on Your Federal Tax Return?

If you're in the market to purchase a home, you've probably realized there are a lot of costs involved. But home ownership also provides a few federal tax deductions. Property taxes paid to your city, county or state are eligible for a tax deductions if the tax meets certain criteria.

Property Taxes

Property taxes are imposed on property owners across the country. In most places, counties are in charge of assessing and collecting the tax. Some cities (typically larger ones) also collect a property taxes. The revenue generated from property taxes is used to pay for various things as determined by the tax jurisdiction's budget. Generally the tax covers initiatives such as public schools and public safety.

Assessments

Your tax bill is calculated based on the tax assessed value of your property. The tax jurisdiction sets a tax rate, and then assesses the properties located within the city's boundaries. Tax bills are typically due once or twice yearly. If you have an escrow account established with your mortgage lender, you pay a portion of the tax monthly, and the lender takes care of the final bill. If you don't have an escrow, you are responsible for making the payments on time.

Allowed Deductions

Home owners can deduct the property taxes paid to a city in the tax year on their federal tax return. For the tax deduction to qualify, your tax must be determined in the same manner as the other property's in the city. This means that the taxes paid must have been based on the property's assessed value and all properties must be assessed in the same manner. If you use an escrow account, only the portion of you payment that went directly to the taxing authority is deducible. Other portions of the escrow that go towards homeowner's insurance or as a cushion are not deductible.

Nondeductible Taxes

Some cities use the funds from property taxes to make improvements to the community, like improving the sidewalks. If a cost is considered to increase the value of your property, you cannot deduct that amount. Additionally, some fees are charged through the city tax collector that are nondeductible. These include flat-rate fees for a service, such as garbage removal. These situations are more specific to the city you reside in. The tax collector should provide an itemized receipt of what your tax dollars are going towards at the end of the year.