State and local governments raise revenue from several sources, including property taxes on the real estate and personal property that residents own. Each local government or special district has its own methods for charging and collecting property taxes, which can impact how, and how much, tax payers are liable for. Many agencies that collect property taxes require residents to pay them in arrears.
The Meaning of Arrears
Paying taxes in arrears refers to paying for the previous year's tax liability during the current year. Many states, counties, fire districts, school districts and villages collect property taxes in arrears, assessing property during one year but not sending tax bills to residents until the following year. This means that residents can own property for up to a year before they need to pay property taxes on it.
Process of Paying in Arrears
The process of paying taxes in arrears is similar to the process for paying property taxes to cover the current tax year. In each case, the local government assigns an assessor to determine the value of a tax payer's taxable property, which generally includes real estate but may also extend to personal property, such as cars, boats and valuables. The amount of property tax that a resident owes does not change based on paying in arrears, although it does allow tax payers to keep their money longer before making payments, giving them more time to earn interest or grow their money through investing.
Making Installment Payments
Some tax agencies allow residents to pay property taxes in arrears in installments. For example, a typical property tax year runs from January 1 to December 31. Residents may then receive two bills during the following year, one in May and one in November, to cover their property taxes for the previous year. Since the property owner, for tax purposes, is the owner on January 1, someone who sells property in mid-January may not be done paying taxes on that property until the following November, 22 months later.
Dealing With Tax Proration
Resident tax payers who buy or sell property need to understand how their local governments and districts deal with tax proration, which refers to the process of paying a portion of property tax based on time of ownership. For example, when someone sells or buys a home, the seller and buyer can decide on how to split, or prorate, the property taxes based on local tax policies and whether they pay property taxes in arrears. Tax agencies that levy property tax on personal property allow residents to prorate taxes in arrears by only charging them for the portion of the previous year that they owner the property.
- IN.gov: Property Tax Due Dates
- Reference: What Does It Mean to Pay Property Taxes in Arrears?
- U.S. Census Bureau. "Local Governments in Northeast More Reliant on Property Taxes than South and West." Accessed Nov. 26, 2019.
- Organisation for Economic Co-operation and Development. "Tax on Property." Accessed Nov. 26, 2019.
- Internal Revenue Service. "1.14.4 Personal Property Management." Accessed Nov. 26, 2019.
- Tax Foundation. "States Should Continue to Reform Taxes on Tangible Personal Property." Accessed Dec. 18, 2019.
- Tax Foundation. "Testimony before the House Ways and Means Select Revenue Measures Subcommittee." Accessed Dec. 18, 2019.
- Internal Revenue Service. "With New SALT Limit, IRS Explains Tax Treatment of State and Local Tax Refunds." Accessed Dec. 18, 2019.