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What Are Personal Property Taxes?

What Are Personal Property Taxes?
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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.

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.

The rate of personal property tax varies by state. For an indication, ​23​ states do not have a personal property tax on motor vehicles. A few examples are:

  • Hawaii
  • Delaware
  • Utah
  • New Mexico
  • Maryland
  • Ohio
  • Pennsylvania
  • New York
  • Texas
  • Illinois

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.

What About Personal Property Taxes for Businesses?

Taxes on personal property used in businesses are deducted as business expenses. Sole proprietors will include personal property taxes on Schedule C.

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:

  • Delaware
  • Hawaii
  • Illinois
  • Iowa
  • Minnesota
  • New Hampshire
  • New Jersey
  • New York
  • North Dakota
  • Ohio
  • Pennsylvania
  • 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.