Filing Your Income Taxes
States, counties and towns use a variety of taxes to collect funds that pay for government services. A personal property tax is one way they raise revenue.
The types of property classified as personal and the property tax rate are not uniform for all states and towns. Each jurisdiction has its own definition of what it classifies as personal property, how the property is valued and the rate charged.
On the brighter side, the taxes you pay on your personal property may be deductible on your federal income tax return.
What Is Personal Property?
Personal property taxes are separate from the real estate taxes you pay on your home. Personal properties are any items that are movable and are not attached to either land or buildings. A few examples are autos, motorcycles, boats, SUVs and aircraft.
The Internal Revenue Service requires that tangible personal property to meet three requirements:
- It must be property you own
- The tax is based on the assessed value of the property
- The tax must be assessed annually
A property on which you only pay tax at the time of purchase does not meet the IRS definition of a deductible personal property tax because it is imposed annually.
Read More: Deducting State and Local Tax on Your Federal Taxes
How Is Personal Property Taxed?
The rules for taxing personal property are not consistent across the country. Each municipality has its own regulations that tax different types of property.
Personal property is taxed on its assessed value, also known as ad valorem. Some states calculate the property tax on 100 percent of the property’s assessed value, but others may calculate the tax on a lesser percentage of a property's value, for example, 35 percent.
Most municipalities use a tax assessor and references to decide the amount of a personal property tax. Tax assessors determine the true market value of an item, which is the amount that an average buyer would pay for the item. Or they may use industry surveys, such as the National Automobile Dealers Association Blue Book values for cars and trucks.
- New Mexico
- New York
At the other extreme, these are the 10 states with the highest personal property tax rate, with the numbers representing the tax rate percentage:
- Virginia - 4.05
- Mississippi - 3.50
- Rhode Island - 3.46
- Connecticut - 2.06
- Missouri - 2.50
- Maine - 2.40
- South Carolina - 2.40
- Massachusetts - 2.25
- Kansas - 2.01
- New Hampshire - 1.80
Deducting Personal Property Taxes on Your Federal Return
To take a deduction for personal property taxes, you must itemize your deductions on Schedule A and file with federal income tax Form 1040. If the total of your itemized deductions is less than the standard deduction for your filing status, you would take the standard deduction and not be able to deduct your personal property taxes.
Let’s take an example. Suppose your filing status is single. The standard deduction for you would be $12,400 for the tax year 2020. And you have the following itemized deductions:
- Medical expenses - $3,000
- Mortgage interest - $7,000
- Charitable contributions - $2,000
- State and local taxes (including personal property taxes) - $4,000
- Total itemized deductions - $16,000
Since your total itemized deductions, $16,000, is larger than your standard deduction, $12,400, you would itemize your deductions and be able to take advantage of a deduction for your personal property taxes.
When you take the standard deduction, you cannot itemize your deductions.
What Is the Effect of the Tax Cuts and Jobs Act?
The Tax Cuts and Jobs Act of 2017 imposed a limitation on the amount of state and local taxes (SALT) that can be deducted on your federal tax return. The maximum amount allowed is now $10,000. If you have large amounts of other state and local taxes, you may not be able to deduct your personal property taxes.
Suppose you pay the following state and local taxes:
- State income tax - $4,000
- Real estate taxes - $7,000
- Personal property taxes - $1,500
Your state income taxes and real estate taxes add up to $11,000 ($4,000 plus $7,000), and the maximum deduction on your federal return could only be $10,000. So, in this case, you would not be able to deduct your personal property taxes of $1,500.
This type of situation can occur for those who live in states that have high property taxes, like New Jersey. Residents in states that have low property taxes, such as Alabama, or no state income taxes, as in Florida and Texas, would not likely run into the SALT $10,000 limitation and would probably be able to deduct their personal property taxes.
Read More: Is Tax on Buying a New Car Tax Deductible?
What About Personal Property Taxes for Businesses?
Items classified as personal property in a business are furniture, fixtures, computers, inventory, equipment, light trucks and supplies. Values for personal property that can't be determined by a Blue Book or a similar reference are assessed at the original cost less depreciation for age.
In some states, a business may have to pay personal property taxes to both the town and the county.
However, there are 12 states that don't have a tax on business personal property:
- New Hampshire
- New Jersey
- New York
- North Dakota
- South Dakota
Another factor to consider when calculating the tax on business personal property is the assessment ratio. Not all states calculate the tax based on 100 percent of the item's fair market value.
Take South Carolina for example. South Carolina uses an assessment ratio of 10.5 percent of the total value of the item. The personal property tax on a light truck, for instance, valued at $40,000 would be based on an assessed value of $4,200 ($40,000 x 0.105). The state would then send this assessed value of $4,200 to the other municipalities in the state where they would apply the local millage rate to determine the amount of the tax.
The personal property taxes each person owes varies by the state and the rates charged by local municipalities. Some states, like Texas, have no personal property taxes, while other states, like Virginia, can charge upwards of 4 percent. Also, the deductibility of personal property taxes on a person's federal tax return depends on each individual's personal situation. Nothing is consistent across the country.
- Intuit TurboTax: What Are Personal Property Taxes?
- Bankrate: Personal Property Taxes
- thebalance: Learn About the Personal Property Tax Deduction
- Internal Revenue Service: Topic No. 503 Deductible Taxes
- Howstuffworks: How Personal Property Taxes Work
- thebalance: The Tax Cuts and Jobs Acts: What Does It Mean for You?
- The Motley Fool: The States With the Lowest Car Tax
- Investopedia: Tangible Personal Property
- CrowdReason: Business Personal Property Tax: How To Maximize Your Efficiency
- CrowdReason: Business Personal Property Tax In SC: What to Know
- IRS. "Topic No. 503 Deductible Taxes." Accessed Feb. 18, 2020.
- Tax Policy Center Briefing Book. "How Did the TCJA Change the Standard Deduction and Itemized Deductions?" Accessed Feb. 18, 2020.
- Cornell Law School Legal Information Institute. "Title 26 U.S. Code § 164.Taxes." Accessed Feb. 18, 2020.
- Cornell Law School Legal Information Institute. "Title 26 CFR § 1.164-3 - Definitions and Special Rules." Accessed Feb. 18, 2020.
- IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2019." Accessed Feb. 18, 2020.
- IRS. "How Long Should I Keep Records?" Accessed Feb. 18, 2020.
- IRS. "2019 Instructions for Form 6251. Alternative Minimum Tax—Individuals." Accessed Feb. 18, 2020.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.