Property taxes are the elephant in many retirees' living rooms.
A USA Today analysis showed that property tax bills rose by a skimpy 1.2% in 2011--the result of declining home values--but real estate taxes are still one of the largest bills in many senior households. Moreover, the long-term trend in property taxes is ominous. Even with 2011's dip factored in, cities, counties, and school districts collected 20% more in taxes last year than they did in 2006, according to the USA Today report.
Although schools and municipalities have slashed their budgets during the past few years to make ends meet, the cost-cutting can only go so far. Many school districts have dramatically reduced headcount in the wake of the financial crisis, and municipalities have put off investing in all but the most essential infrastructure improvements. In addition, one of the items on the chopping block in some municipalities has been--you guessed it--property-tax relief for senior citizens. Perversely, some of the municipalities most likely to raise property taxes are also the least likely to offer homeowners tax breaks and other programs, even if their incomes are low. For example, in 2009 the California state legislature suspended the state's tax-postponement program for senior, blind, and disabled persons; the program has yet to be reinstated. (Individual California counties can still offer this type of program, however.)
For seniors who have paid off their mortgages and other debts with the aim of limiting their overhead in retirement, high property taxes are an unwelcome ongoing outlay, and big increases can make it difficult to stick to a budget. In fact, in a recent Discuss forum thread about downsizing to a smaller home during retirement, several Morningstar.com readers cited high property taxes on their original homes as a factor in their decisions to relocate and/or downsize during retirement. If reducing your taxes by relocating is on your radar, this interactive map enables you to see how property and other taxes levied within your state compare with those of other states.
But relocating isn't for everyone: Although they could move somewhere cheaper, many seniors stay in large urban centers with high property taxes because that's where their children, grandchildren, and social networks are. Such seniors need to take advantage of every measure they can to keep those tax costs as low as they can be. They also need to stay vigilant: Even if they've appealed their assessed valuations or obtained property tax exemptions or freezes in the past, they might need to reapply in future years.
If you're a senior, or an adult child or grandchild who helps your elders with their finances, you have a few different levers you can pull in order to reduce the property tax load. The specifics will vary widely based on where you live, but here are some strategies to keep on your radar.
Investigate Senior-Specific Programs
A starting point when attempting to lower your property tax bill is to see whether your municipality offers any programs to provide property tax relief for seniors. Most municipalities offer a tax break, called a homestead exemption, for property owners if the home is their primary residence and an even larger exemption for seniors. Income limits may or may not affect eligibility, depending on your location. In addition, check to see if your municipality offers a program not explicitly targeted at seniors but rather for longtime owner-occupants whose incomes fall below a certain level. Bear in mind that you may need to file paperwork to obtain these exemptions, and even if you filed for and qualified for such tax breaks in the past, you might have to refile the paperwork in subsequent years. Check with your assessor's office for details.
Municipalities might also offer additional property tax breaks for lower-income seniors. For instance, seniors with incomes below a certain threshold might be able to obtain a refund on a portion of the income tax they've paid, or freeze their property's assessed valuation at the previous year's level. To obtain a senior freeze in Cook County, Ill., for 2011, for example, a senior's household income must have fallen below $55,000 in 2010. (Obtaining such a freeze won't guarantee your bill will stay low because it only freezes your assessed valuation; your municipality could still raise tax rates for all homeowners.) For seniors who are in a true hardship situation, some municipalities also offer tax-deferral programs that are akin to reverse mortgages. The senior defers payment of the taxes until he or she sells the home or dies; the deferred taxes, plus interest, are due at that time.
Check Into Specialized Programs
In addition to programs geared specifically toward property tax relief for seniors, municipalities may offer tax-reduction programs for other groups, too. Veterans might be able to qualify for special deductions or exemptions provided they meet certain criteria; disabled veterans might qualify for even greater tax breaks. Disabled people, regardless of military service, may also qualify for tax reductions. Many locales also offer property tax breaks for people who have recently made improvements to their homes, to ensure that their assessed valuations don't jump up in the years immediately following the upgrades.
Consider an Appeal
In addition to investigating special exemptions and other tax-savings programs, appealing your property's assessed valuation is another avenue to potentially bring down your bill. The amount of property tax you pay depends on the property tax rate for your area--sometimes called a mill levy--as well as your property's assessed value. You don't directly exert much control over your area's property tax rate, but if the latter figure is off, you might be able to lower your tax bill. For starters, it's possible that your local assessor's office has incorrect information about your home: The form notifying you of your home's proposed valuation might say that you have three bathrooms when in fact you only have two, for example. Alternatively--and this is more common--your home's assessed valuation could be out of whack with other homes in your area with similar features. In that case, you'll need to hunt down examples of homes that are similar to yours but have lower valuations and present that information to your local assessor's office in the form of an appeal. Many municipalities have websites that make it easy to search on the assessed valuation and features of your home as well as others in your area.
You can't appeal your property taxes anytime you feel like it; you'll have to do so within your municipality's window for filing an appeal, typically after the assessor has notified you of your property's proposed assessed valuation. You'll also have to file the paperwork in accordance with your municipality's specifications; your local assessor's office should be able to guide you through the process. If you're time-pressed and/or find the appeal process to be too complicated, you can employ an outside firm to file the appeal for you. Many such firms are well-versed in locating appropriate properties to use as examples, and they might also give you guidance on whether to file an appeal in the first place. Just bear in mind that the fee for that service will cut into your savings; a typical arrangement is to pay the appeals company a percentage of the first year's tax reduction.
Stay Out of the AMT Zone
Making sure that you're not on the hook for the alternative minimum tax--or AMT--won't help reduce your property taxes. But if you've exhausted all of the above-mentioned strategies for reducing your property taxes and they're still high, staying out of the AMT zone should be an even greater priority. That's because property taxes, as well as some other common deductions like state and local income taxes, aren't deductible under the tax calculation for the AMT, even though they're deductible under the regular income tax system. Thus, if you're teetering on the edge of being in the AMT zone, it might be worth consulting a tax professional to help you strategize about how to stay out of it, or at the very least reduce the number of years that you're subject to it. For example, if you expect to be subject to the AMT next year but not this one, you might consider prepaying your property taxes for next year so you can take the deduction on your 2012 tax return. This article provides an overview of strategies for reducing your susceptibility to the AMT.
A USA Today analysis showed that property tax bills rose by a skimpy 1.2% in 2011--the result of declining home values--but real estate taxes are still one of the largest bills in many senior households. Moreover, the long-term trend in property taxes is ominous. Even with 2011's dip factored in, cities, counties, and school districts collected 20% more in taxes last year than they did in 2006, according to the USA Today report.
Although schools and municipalities have slashed their budgets during the past few years to make ends meet, the cost-cutting can only go so far. Many school districts have dramatically reduced headcount in the wake of the financial crisis, and municipalities have put off investing in all but the most essential infrastructure improvements. In addition, one of the items on the chopping block in some municipalities has been--you guessed it--property-tax relief for senior citizens. Perversely, some of the municipalities most likely to raise property taxes are also the least likely to offer homeowners tax breaks and other programs, even if their incomes are low. For example, in 2009 the California state legislature suspended the state's tax-postponement program for senior, blind, and disabled persons; the program has yet to be reinstated. (Individual California counties can still offer this type of program, however.)
For seniors who have paid off their mortgages and other debts with the aim of limiting their overhead in retirement, high property taxes are an unwelcome ongoing outlay, and big increases can make it difficult to stick to a budget. In fact, in a recent Discuss forum thread about downsizing to a smaller home during retirement, several Morningstar.com readers cited high property taxes on their original homes as a factor in their decisions to relocate and/or downsize during retirement. If reducing your taxes by relocating is on your radar, this interactive map enables you to see how property and other taxes levied within your state compare with those of other states.
But relocating isn't for everyone: Although they could move somewhere cheaper, many seniors stay in large urban centers with high property taxes because that's where their children, grandchildren, and social networks are. Such seniors need to take advantage of every measure they can to keep those tax costs as low as they can be. They also need to stay vigilant: Even if they've appealed their assessed valuations or obtained property tax exemptions or freezes in the past, they might need to reapply in future years.
If you're a senior, or an adult child or grandchild who helps your elders with their finances, you have a few different levers you can pull in order to reduce the property tax load. The specifics will vary widely based on where you live, but here are some strategies to keep on your radar.
Investigate Senior-Specific Programs
A starting point when attempting to lower your property tax bill is to see whether your municipality offers any programs to provide property tax relief for seniors. Most municipalities offer a tax break, called a homestead exemption, for property owners if the home is their primary residence and an even larger exemption for seniors. Income limits may or may not affect eligibility, depending on your location. In addition, check to see if your municipality offers a program not explicitly targeted at seniors but rather for longtime owner-occupants whose incomes fall below a certain level. Bear in mind that you may need to file paperwork to obtain these exemptions, and even if you filed for and qualified for such tax breaks in the past, you might have to refile the paperwork in subsequent years. Check with your assessor's office for details.
Municipalities might also offer additional property tax breaks for lower-income seniors. For instance, seniors with incomes below a certain threshold might be able to obtain a refund on a portion of the income tax they've paid, or freeze their property's assessed valuation at the previous year's level. To obtain a senior freeze in Cook County, Ill., for 2011, for example, a senior's household income must have fallen below $55,000 in 2010. (Obtaining such a freeze won't guarantee your bill will stay low because it only freezes your assessed valuation; your municipality could still raise tax rates for all homeowners.) For seniors who are in a true hardship situation, some municipalities also offer tax-deferral programs that are akin to reverse mortgages. The senior defers payment of the taxes until he or she sells the home or dies; the deferred taxes, plus interest, are due at that time.
Check Into Specialized Programs
In addition to programs geared specifically toward property tax relief for seniors, municipalities may offer tax-reduction programs for other groups, too. Veterans might be able to qualify for special deductions or exemptions provided they meet certain criteria; disabled veterans might qualify for even greater tax breaks. Disabled people, regardless of military service, may also qualify for tax reductions. Many locales also offer property tax breaks for people who have recently made improvements to their homes, to ensure that their assessed valuations don't jump up in the years immediately following the upgrades.
Consider an Appeal
In addition to investigating special exemptions and other tax-savings programs, appealing your property's assessed valuation is another avenue to potentially bring down your bill. The amount of property tax you pay depends on the property tax rate for your area--sometimes called a mill levy--as well as your property's assessed value. You don't directly exert much control over your area's property tax rate, but if the latter figure is off, you might be able to lower your tax bill. For starters, it's possible that your local assessor's office has incorrect information about your home: The form notifying you of your home's proposed valuation might say that you have three bathrooms when in fact you only have two, for example. Alternatively--and this is more common--your home's assessed valuation could be out of whack with other homes in your area with similar features. In that case, you'll need to hunt down examples of homes that are similar to yours but have lower valuations and present that information to your local assessor's office in the form of an appeal. Many municipalities have websites that make it easy to search on the assessed valuation and features of your home as well as others in your area.
You can't appeal your property taxes anytime you feel like it; you'll have to do so within your municipality's window for filing an appeal, typically after the assessor has notified you of your property's proposed assessed valuation. You'll also have to file the paperwork in accordance with your municipality's specifications; your local assessor's office should be able to guide you through the process. If you're time-pressed and/or find the appeal process to be too complicated, you can employ an outside firm to file the appeal for you. Many such firms are well-versed in locating appropriate properties to use as examples, and they might also give you guidance on whether to file an appeal in the first place. Just bear in mind that the fee for that service will cut into your savings; a typical arrangement is to pay the appeals company a percentage of the first year's tax reduction.
Stay Out of the AMT Zone
Making sure that you're not on the hook for the alternative minimum tax--or AMT--won't help reduce your property taxes. But if you've exhausted all of the above-mentioned strategies for reducing your property taxes and they're still high, staying out of the AMT zone should be an even greater priority. That's because property taxes, as well as some other common deductions like state and local income taxes, aren't deductible under the tax calculation for the AMT, even though they're deductible under the regular income tax system. Thus, if you're teetering on the edge of being in the AMT zone, it might be worth consulting a tax professional to help you strategize about how to stay out of it, or at the very least reduce the number of years that you're subject to it. For example, if you expect to be subject to the AMT next year but not this one, you might consider prepaying your property taxes for next year so you can take the deduction on your 2012 tax return. This article provides an overview of strategies for reducing your susceptibility to the AMT.
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