Property Tax: How Much is Deductible?
If you are a CA tax preparer and are simply entering the amount of property tax that your clients have entered on the organizer, you are no doubt deducting too much.
Background—After proposition 13 limited increases in property tax, the local and county governments have been doing everything they can to obtain additional revenue by tacking on fees to property tax bills. Some of these additions are deductible and some are not.
New Matching Program—The FTB has reviewed this issue and determined that there is enough tax revenue lost to excessive property tax deductions that they have developed a new program that will allow them to match what the counties say is deductible with what is actually being deducted by individual taxpayers.
A part of this program was the FTB’s attempt to require first and second home parcel numbers to be entered on the 2011 Schedule CA, giving them the ability to cross check with county tax data. They subsequently backed off of that requirement for 2011 but will require them on the 2012 returns.
How To Determine the Correct Deductible Amount—The FTB has added a very extensive page to their website: This site explains how to determine the correct deductible amount from a property tax bill. The site even has sample tax bills from all California counties showing what is deductible and what is not.
- Deductible taxes: Generally, only the amount based on the assessed value of the taxpayers' property is deductible. These amounts are commonly referred to as ad valorem or general tax levy on property tax bills. For most counties, the deductible amount is identified on property tax bills as the assessed value multiplied by an associated tax rate percentage. A few county property tax bills do not show tax rate percentages for items that may be deductible. However, sample property tax bills are available on the FTB webpage and are enhanced to show the deductible and nondeductible amounts.
- Nondeductible taxes: Most property tax bills also include non-ad valorem special assessments, special taxes, Mello-Roos, direct levies, fees, and charges that are nondeductible. For most counties, these amounts are identified on the tax bills as amounts that do not include a tax rate percentage.
Reviewing each and every property tax bill adds a significant burden to the tax interview process but is part of the job. Keep in mind that CA shares information with the IRS, so not doing it right can create a situation where you are spending hours dealing with letters and notices from the FTB. Although they do not have the parcel numbers for 2011, they may have other options up their sleeves. So do it right and avoid the problems later.
Lee Reams Sr.
Lee T. Reams is the Chief Technical Officer of ClientWhys. He is also an Enrolled Agent having managed a 600-plus client tax practice. Educated as an engineer, with a Bachelor's Degree in Mechanical Engineering, Lee left his engineering career in 1975 to expand his part-time tax practice into a full-time career.