My bank account took a hit today. Nope, not from Christmas gift charges finally showing up on credit card bills.
And nope, not from post-Christmas bargain hunting. It seems, according to the New York Times, that I and lots of other nonshoppers didn’t head to the malls yesterday to load up on marked-down merchandise, although the Washington Post found folks there streaming back to malls in search of deep discounts.
This time my money -- a whole lot of it -- went to the Travis County Tax Assessor Collector.
Home appreciation. It’s great when you’re selling. A challenge when you’re buying. And a killer when your property tax bill is due.
Everyone talks about how homeowners -- well, actually, home sellers -- are making out like bandits thanks to the escalating price of residential property across the country. But the real winners have been local tax collectors.
Our bill arrived with a historical look at the tax levies on our suburban Austin property. When our house was built, the county got to collect 541 percent more in taxes than it did for the vacant lot (and I thought out here in Texas it was land that was valuable!). While subsequent increases haven’t been that dramatic, Travis County hasn’t made out too badly over the years.
The really interesting thing about the tax history is that you can definitely see where Austin, or at least my neighborhood, experienced a bubble burst. Back in 2003, the percentage property tax hike was just a third of the previous year’s increase. That was when the Hill Country’s high-tech boom went bust and people suddenly without jobs were unloading houses to alleviate debt loads.
Things have picked up and are at a more reasonable pace. As new Austin-area buyers, I must admit we were thrilled that (a) the housing price escalation was just beginning to re-ramp up when we arrived and (b) that Alan Greenspan and his buddies weren’t able to get mortgage loan rates up before we found this place.
As for what the tax assessor collector thinks our property is now worth, don’t get me wrong. While I wish it wasn't so much, I’m not a tax protester. I fully understand that every entity -- individual, corporate or governmental -- has to come up with income to operate. And property taxes are not new; it’s the way they’ve been figured that’s been tweaked over time.
Check out this photo of a Fredericksburg, Va., home entitled “Narrow houses paid low taxes.” (Just be sure to click the “back” button to return to Don’t Mess With Taxes!) Nick Szabo, who blogs at Unenumerated on, among other things, law and history, notes in an academic paper that historically taxes were levied on the prices of commodities sold or on various ad hoc measures of wealth such as a home’s frontage:
"This measurement game resulted in the very tall and deep but narrow houses that can still be found in some European cities such as Amsterdam. The stairs are so narrow that even normal furniture has to be hauled up to the upper story and then through a window with a small crane, itself a common feature on these houses."
The taxation method made it across the pond; hence, the earliest U.S. property owners looked to shave their bills by constructing similar long and narrow homes a la the pictured Fredericksburg structure.
Regardless of how they’re figured, at least a portion of property taxes support essential county services and, in most cases, local school district needs. Of course, that school component is a bit problematic here in Texas, where the property tax system used to pay for public schools has been deemed unconstitutional and our legislators just can’t get their acts together to fix it.
When we arrived in the state back in early May, lawmakers had about a month left in regular session to deal with this issue. Didn’t happen. Two special sessions later, still nothing. The Texas Supreme Court has given the state until June 1, 2006, to come up with a new school funding plan. We’ll see. Judging from this time line, it’s going to take a whole lot to get these yahoos going.
One other relatively positive aspect of property taxes: They’re deductible against your federal tax liability (much to the dismay of the President's Advisory Council on Tax Reform.) I put the property tax check in the mail today so that I can count it against my 2005 tax bill when I file next year. If you want to do the same, you’ve got until Dec. 31 to pay up, which could amount to quite a tax deduction for some people.
Take, for example, Don't Mess With Taxes reader Amit, who got a bill that included both 2005 and 2006 property tax assessments. He checked with the IRS, which told him “irrespective of calendar year billing assumption, if a property tax bill was sent to you and you pay it, you can claim deduction for the tax year in which you make the payment. Does not matter if the bill was for 2005, 2006. What matters is when you pay it.”
Amit goes on to note that people can exploit this to adjust their deductions. For example, let's assume the property tax for your property is $1,000 and the fiscal year is July to June. You can pay the full $1,000 this December and get the full deduction for 2005. Or you have the convenience of paying in equal installments, $500 in December and $500 in April, spreading the tax break over two years. Then when the 2006-07 bill comes, you can do the same, giving you possibly a $1,500 deduction in 2006 if you pay in full that December.
The choice is yours depending on your individual financial situation, tax circumstances and deduction needs each year. Thanks, Amit, for the research and examples, and quit looking to take my job!
Whatever payment strategy you employ to maximize your tax savings, just make sure it meets the property tax due date. Failure to pay can cause you lots of tax and property problems, although probably not any as publicly annoying as this tactic reported by Reuters via MSNBC: Authorities in the southern India city of Andhra Pradesh hired drummers (in groups of 20) to play nonstop outside the homes of property tax delinquents until they paid up. In one week, 18 percent of the $1.15 million backlog was collected.
Thanks to bloggers Mauled Again and TaxProf for drumming up (sorry!) the Indian property tax tidbit. And you can go here for the full (and correct) lyrics to Graham Nash’s “Our House” that I borrowed for this entry’s title.