Calculating Property Tax Valuation

Have you ever wondered how your city comes up with your property tax value? If you are worried that your real estate taxes might be unfairly high, then you might want to understand the basics of computing your property tax valuation.

First and foremost, even if your property tax statement is seemingly crowded with complicated terms such as millage rates, ration, etc., you must know that property tax simply comes down to only a few factors: the market value of your property, your cities assessment ratio and the tax rate.

Market Value

To put it simply, market value is what your property sales for under a normal sale, disregarding any “undue influences” like being in a state of foreclosure, structural issues with the property, short sales time frame, among other.

Assessment Ratio

The assessment ratio is oftentimes is what is generally referred to as your “property tax value.” What is done here is that cities multiply your market value, by the assessment ratio, the resulting number is the assessed value. However, bear in mind that assessment ratios is different from one state to another. In fact, don’t be surprised if your assessment rate is totaling different than your neighboring town.

For instance, if your if your properties market value is $500,000 and your cities assessment ratio is 80% your property tax value would be: $500,000 x.80= $400,000 assessed value.

Tax Rate

The tax rate, also known as a millage rate, is the actual rate that property owners pay in their given town. Similar to assessment ratio, tax rate varies from town to town, not to mention building types. Case in point: a bungalow home will be taxed at a different rate than a commercial building.

To determine your annual taxes, you multiple the tax rate by the assessed value. For example take the assessed value of $400,000 x.020 (tax rate/millage rate) = $8,000 in annual property taxes.

Tax Appeal

In the event of a real estate tax appeal, remember that you can only argue about the fair market value of your property. You can never question the tax rate or the assessment ration, unless they made an error and recorded your property in the wrong category.


Offsetting Taxes From Capital Gains

Capital gains are good, for most people. This is what happens when a property or asset is sold at a higher value than when it was purchased, resulting in a profit for the previous owner. Among the most common types of property to have this would be real estate, but it can also apply to stocks and bonds. However, the issue of capital gains tax mars the process somewhat. These are taxes applied to the sale of such properties and gains, both short-term and long-term. Short-term gains are at the same rate as regular income taxes, while long-term transactions have a much lower rate. For many investors and buyers, the capital gains tax can represent a large amount of money lost from the transaction, so they seek ways to avoid it.

For those that are dealing with property in the transactions, among the most common ways is to use the Section 1031 exchange, if the properties qualify. This involves the exchange, rather than sale, of real estate properties used for the purposes of investment or business. The properties in question must be of like kind, but not necessarily of the same grade or quality. Both must also be used for purposes or functions that further the business or investment. If both properties involved meet the requirements of the regulation, then it is possible for the exchange to push through exempted from all capital gains tax.

Long-term investments are also suggested. The idea for this is to invest in a company for a long period before selling, to get the lowest rate of the capital gains tax. However, this is usually difficult to achieve because of a number of factors. The status of the company can change, drastically affecting the value of their shares. There are any number of valid reasons that may make someone sell earlier than expected, thus paying a higher capital gains tax.

Finally, the most drastic option is to use capital losses to offset the gains. This strategy requires that investments actually decrease in value, which allows one to also decrease the amount of tax paid on them. Ideally, all investments should be appreciating, but losses can occur and it is good to know that these can be used to offset other gains. However, it is still ill-advised to depend on this entirely, both because of the depreciating investments and the existence of a cap on the amount of losses that can be used to offset gains.

Preparing and Filing your State Tax Return

It’s that time of the year again when you have to stress yourself about that annoying income tax return. Unless you’re lucky that you live in one of the few states that d not have income tax, such as Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Where to Begin:

Before anything else, you have to make sure that your federal return is accurate and complete. Your federal return is always the starting line for just about every state income tax return. If not, don’t even bother thinking of preparing your state return.

Adjusting your Federal Income to State Income:

Once you have verified that the information from your federal return is accurate, you can now enter them on your state income tax return. You will need to make some additions or subtractions to it to reconcile the differences between your federal taxable income and your state taxable income. One of the adjustments that you will need to make is addition which are usually add-backs of any federal deductions that you have taken but are not permitted on your state return or income items. They may not be allowed since they are tax-exempt for federal purposes, but are taxed at the state level. On the other hand, subtractions should be done for income items that are taxable under federal tax law, but are tax-exempt under state tax law. Also, subtraction is done for state-specific deductions. The adjustments that you need to make on your tax return will depend upon the extent your state conforms to the federal tax code.

Common Additions:

Below are the common state additions to federal income:

  • Bonus depreciation
  • Interest on municipal bonds from other states
  • Moving expenses
  • Student loan interest

Common Subtractions:

Below are the common state subtractions from federal income:

  • Deduction for federal income taxes, only if your state offers this deduction
  • Social Security and other retirement benefits that are taxed federally
  • Contributions to your state’s 529 college savings plan
  • State income tax refunds
  • State lottery winnings

Figuring your State Tax Liability:

After you have calculated your taxable income for state income tax purposes, you will come up with your gross state tax liability. Most states implement tax brackets with tax rates that depend on income. For instance, tax rates increase as income increases. To calculate your tax, a table is necessary. However, there are a few states that have one flat tax rate that all taxpayers pay regardless of the amount of income.

Calculating your Tax Due:

Once you have your tax liability, you will need to  reduce that by any state tax credits that you are qualified for. States have varied tax credits, but many have their own types of child tax credits and earned income credits. Most tax credits can only reduce your tax liability to zero. However, there are some refundable tax credits, which are treated as a payment of tax with any leftover credit that you refund.

Filing Your State Income Tax Return:

After preparing your state income tax return, you are now ready to file it. Nowadays, people prefer to do it electronically since it is more convenient. To have a more accurate return, you can make use of a software program. You can also get your refund faster if you file and choose direct deposit electronically as well. If you’re not aware of these software programs, you can check out your state’s website. For instance, some states have purchased tax software programs like Turbo Tax, which includes a state tax return preparation to make your life a lot easier.

US Treasury Releases HIRE Act Report

The US Treasury Department has just released an updated report on the number of newly-hired workers eligible for tax credits under the recent Hiring Incentives to Restore Employment (HIRE) Act.

Passed in March, the HIRE Act offers an exemption from Social Security payroll taxes for every worker hired after February 3, 2010, and before January 1, 2011, who has been unemployed for 60 days or longer. The maximum value of the credit is equal to 6.2% of wages up to $106,800, the Federal Insurance Contributions Act wage cap. There is also an additional $1,000 income tax credit for every new employee retained for 52 weeks, creditable on on the employer’s 2011 income tax return.

The Internal Revenue Service’s data on the HIRE Act will not be available until after the filing of tax returns in 2011. However, the Treasury Department’s Office of Economic Policy has provided estimates on employers who potentially qualify for the HIRE tax exemption.

According to the report, between February and October this year, businesses hired an estimated 8.1 million new workers who had been unemployed for 60 days or longer. Such businesses are thus eligible for HIRE tax exemptions and credits.

These newly hired workers constitute approximately 11.7% of all workers who were unemployed for eight weeks or longer since the law’s passage. This means that one in eight workers who have been unemployed for eight weeks or longer are hired in the subsequent month.

The report also shows estimates by state on the number of eligible hires. Many states with high unemployment rates have large numbers of potentially eligible new hires. This includes California (over 1.1 million), Ohio (around 350,000), and Michigan (over 260,000).

“Targeted programs like the HIRE Act tax credit provide an incentive for private-sector employers to hire new workers sooner than they otherwise would,” said Alan B. Krueger, Assistant Secretary for Economic Policy and Chief Economist at the Treasury Department. “Since it’s only in effect through the end of the year, the HIRE Act encourages businesses to accelerate hiring in order to get the maximum benefit from this temporary tax credit.”