Federal, state and local governments each tax citizens in different ways. For example, they may charge an income tax, a sales tax, a hotel tax, an estate tax and more. Most people may pay multiple types of taxes over the course of a year rather than just one type. Taxes are generally used to pay for special services, such as military, law enforcement and others. They also are used to maintain roads, fund schools and libraries and much more. One of the more common and significant types of tax in many areas is a property tax. Learning how to calculate property tax can help you to better manage your finances.
Understanding Property Tax
Before learning how are property taxes calculated, you need to understand what a property tax is. Essentially, this is a tax that is based on the current value of an asset that you own. A sales tax is a tax on an asset or product that is assessed at the time of purchase. However, property tax is usually assessed based on the assets current value every year. This means that property tax is a recurring expense for as long as you own the property. To learn how to calculate property tax, you should be aware that there are different types of property taxes.
What Types of Property Taxes Are There?
The most common and significant type of property tax for most people is a real estate tax. This tax could be based on a residential property, a commercial property or even raw land. The property owner is responsible for paying this tax annually. However, some commercial leases pass this expense onto the tenant. Property tax rates vary substantially from location to location.
There are other ways that a property tax could be imposed on citizens. However, these options are not commonly associated with a true property tax. For example, a vehicle registration fee is usually paid annually in most states. This is a type of tax placed on the vehicle. It is in place for commercial and private use vehicles. Unlike real estate tax, which is calculated based on the current value of the property, a vehicle registration tax is usually based on the type of vehicle that is owned. In addition, a vehicle registration tax is substantially lower than real estate property tax in most situations.
How to Calculate Property Tax
Real estate property tax is usually more significant and more commonly used with the term property tax. That’s why you may be want to learn how are property taxes calculated for real estate. When you want to know more about the calculation used for property tax, you must understand your local property tax rate. You should also research your property’s current value. The tax rate can change annually. In addition, it may include components for your county, your local school district, your utility district and other factors, depending on where the property is located. Because multiple components affect the tax rate, there are instances when the tax rate applied to properties in a local area can increase substantially over the course of a single year.
When researching your current property value, keep in mind that your taxing authority will typically not look at the current real estate listings to estimate value. Instead, the taxing authority may use comparable sales data for homes in your local area that are of a similar size. Special features, upgrades and more are not usually taken into account when determining value. While property tax rates can fluctuate rather dramatically at times, the same holds true for real estate values. When property owners pay attention to these two components over the course of a year, you may be better prepared for any minor or significant adjustments to your property tax bill in comparison to last year’s bill.
To learn how to calculate property tax, you simply multiple the tax rate by the property value.
Here is an example:
If your tax rate is two percent and the house value is $400,000, your property tax amount for the year would be calculated by multiplying 400,000 by .02. This yields a property tax bill of $8,000, and this is usually an annual cost for the homeowner. Some homeowners pay this expense out of their pocket in a lump sum. Others make escrow payments to their mortgage company throughout the year, and the mortgage company pays the tax bill out of the funds in the escrow account.
Because this cost can vary substantially from county to county and school district to school district, it is important for home buyers to research tax rates in different areas before deciding where to buy a home. They also should know how to calculate property tax. This can be a major component to your total living expenses, and you need to understand this cost and even look around for ways to reduce the cost. You also need to monitor changes that could impact the cost of your property tax bill each year going forward.
Applications of Property Tax
The calculation for property taxes is most commonly used by a taxing authority to determine your annual taxes owed on the property. However, it can also be used by homeowners. When homeowners know how to calculate property tax, they can shop around to find a home that has more affordable property tax. Remember that property tax is a deduction on your federal income tax return.
Therefore, you also may need to know how to calculate property tax when you are estimating your income tax bill for the coming year. Because this is a critical component in a homeowner’s or commercial property owner’s property-related expenses, it should be calculated up-front. In addition, this figure can change annually based on the new tax rate and current property value. Therefore, property owners should regularly make this calculation so that they can manage their budget and finances more accurately.
Practical Example of Knowing Property Tax
You may be wondering how knowing how to calculate property tax can benefit you. After all, you could simply let the taxing authority send you a bill each year. You can react to that after the fact. However, when you make an educated buying decision by making this calculation up-front, you may keep the cost of ownership lower.
In addition, when you know how to make this important calculation on your own, you can confirm that the tax bill is accurate. In some instances, taxing authorities have overvalued a home. Property owners can protest the tax calculation. When you provide proof to support your case to the taxation authority, you may be able to reduce your tax bill and save a substantial amount of money.
The concept of calculating your property tax bill can sound intimidating and confusing at first. However, you can see that the calculation for real estate property tax is rather simple. In addition, it is usually easy to research the two primary components for this calculation, which are the tax rate and property value. With this knowledge, you can make more informed buying decisions, tax planning decisions and budgeting decisions going forward.
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