Tuesday, April 17, 2007

Homeowners-Tax Minimization 101

Every year about this time, if you own your home, a couple of things happen that reiterate the fact that you are working a good part of the year supporting your government. First, you've completed and sent off your federal and state tax return, possibly with big checks, despite the fact that you hardly recognize your paycheck after the government has taken their share each week. Second, you receive your property tax appraisal. It, of course, indicates your home value has increased, meaning you'll owe even more property tax next year. This, despite the fact that your property value may have gone down in the past year after the housing bubble burst.

Since governments have assumed/established their power to tax you however they see fit, it is tempting to take a fatalistic attitude and just accept what seems to be the inevitable. Before you throw in the towel, there may be a few things you can do, and this may be the time to think about them and put some new strategies in place.

Let's take the property appraisal first. Since, in most cases, property tax rates are based on a percentage of the appraised value, or some related figure, the property value directly affects your taxes. Amazingly, the taxing authority probably provides you the tools to challenge the appraisal, and reduce your taxes. Your appraisal form will probably help you identify where you can go to do just that, but these days the starting point is usually a web site maintained by the taxing authority. There you can compare how your appraisal (and taxes) matches up with your neighbors. You also can likely see the prices of recent home sales in your area. Compare prices per square foot, age, amenities and condition of the homes. There is a good chance that you can make a case that your appraisal is too high. Sources I have seen indicate that as many as 80% of homeowners who challenge their appraisals win some relief. You can do this in one of 3 ways.
  • Call up the tax appraisal office and discuss. I've had considerable success in agreeing on a lower appraisal using this method. The tax appraisal office seems like a huge, faceless, bureacracy, but once you are talking to an individual you may find they are very understanding, and even willing to help.
  • File a formal protest and set up a meeting to protest or challenge the evaluation. There is usually a deadline for protests, so now is the time to act. Prepare for the meeting and go ready to make your case.
  • Call in a professional. If you don't feel comfortable making the case, or if you just don't have the time, you can get a professional to do it for you. There is a cottage industry of professionals who do this full time. They will know the people, understand the system and have both an understanding of the strategies and experience in negotiation. And, best of all, they usually work on a contingency basis. That means that if they are unsuccessful, it costs you nothing. If they reduce your taxes, you pay them a percentage of the reduction. This alone tells you that a high percentage of protests are successful.

Whichever way you go about it, there is likely to be both a short term and a longer term benefit. If you get a reduction in the evaluation, that is money in the bank at the end of the year. And, since appraisals are often handled as percentage increases from previous appraisals, your taxes for years to come are likely to be lowered.

With that savings under your belt, take a good look at your Form 1040. Were your itemized deductions higher than the standard deduction by the full amount of your mortgage interest and property taxes? Probably not, and, if not, you have some room for tax savings. Your deductions are being offset by the standard deduction, meaning your interest and property taxes are not effectively fully benefiting you. You many not ever be able to make them fully work for you, but you can likely increase the benefit (therefore reducing your taxes) by a couple of different strategies.

  • First, consider paying your house payment the last day of the year rather than the first day of next year. By doing this, you squeeze 13 months of interest into the year. This will speed up the deduction to this year, and if you take the standard deduction or are very close, it may not effect your taxes next year. Just alternate each year paying on the last day one year and the first day the next. You'll get the benefit of your deduction every other year, maximizing your standard deduction in the alternate years.
  • Second, consider when you pay your property taxes. Assuming you pay them directly, you can apply the same bunching into alternative years as above. If you don't pay your taxes directly, try to set them up that way. By collecting for these taxes on a monthly basis in an escrow account, your mortgage company is getting a free loan from you, since they collect the taxes each month and don't pay them out until the following year. In fact, they probably have significant carryover from year to year, all interest free. They'll be reluctant to eliminate this profit center for obvious reasons-they make money on it, and they reduce the risk that you won't pay the taxes and lead to foreclosure. But, if you've paid regularly, demonstated fiscal discipline and have a significant equity in the house, they probably will allow you to pay taxes directly. In some states, laws require them to allow you to pay the taxes directly under certain circumstances. When you are buying, insist on this arrangement. I haven't allowed my mortgage company to collect the taxes in an escrow account on any of the houses I've owned over the past 20 years. Just make sure you put the money aside each month in some solid investment, so the money is available to pay the taxes at the end of the year.

So there you are. With a few simple strategies, you can cut back on your cost of feeding the government machine. Yes, death and taxes are inevitable, but in the case of taxes, at least, you can negotiate a reduction.

No comments: