Understanding How Property Taxes Are Calculated and Collected
Property taxes play a vital role in supporting your community’s infrastructure, including funding for schools, road maintenance, public safety departments, recreational areas, and local transit systems. These taxes are imposed by municipal, county, and educational districts, all of which contribute to your total property tax rate. This combined rate is then applied to your property’s assessed value to calculate the annual amount you owe.
Property taxes are based on real estate, which includes not only the land itself but also any structures permanently built on it, such as a home or garage. The assessed value, which serves as the basis for taxation, varies depending on the property’s location, size, and features. Undeveloped land generally receives a lower valuation unless it’s connected to utility services like electricity, water, or sewer systems.
Local tax assessors, government officials responsible for determining property values, typically perform assessments once a year or less often, depending on the locality. The assessment process may involve one or more of these methods:
Comparable Sales Approach: Looks at recent sale prices of similar properties nearby, considering factors like upgrades and condition.
Replacement Cost Approach: Estimates the cost to rebuild the structure from scratch, factoring in depreciation.
Income Approach: Often used for rental or commercial properties, this method projects the income the property could generate and subtracts expenses.
The total tax rate, referred to as the millage rate or mill levy, combines all local rates and is expressed in mills, where one mill equals $1 per $1,000 of assessed value. For example, if your home is assessed at $100,000 and your local tax rate is 50 mills (or 5%), you would owe $5,000 in property taxes.
Paying Through Escrow
Many homeowners use an escrow account tied to their mortgage to handle property tax payments. This allows lenders to set aside money monthly and pay the taxes directly when due, minimizing the risk of late fees or liens. If you opt out of escrow, you’ll be responsible for paying taxes directly, which may be due annually, semiannually, or in installments depending on your jurisdiction.
Property taxes make up a substantial portion of local government revenue. In 2022, they contributed 10.6% to overall U.S. tax collections. According to the U.S. Census Bureau, property tax revenue rose by 1.3% in the last quarter of 2023, growing from $769.2 billion to $778.9 billion.
Homeowners can generally deduct property taxes from their federal income taxes, but this deduction is subject to limits and varies based on your state and financial situation. To better understand your options and ensure compliance, it’s wise to consult a qualified tax advisor.
