Individuals can deduct personal property taxes paid during the year as an itemized deduction on Schedule A of their federal tax returns, at least up to a point. This deduction was unlimited until the Tax Cuts and Jobs Act (TCJA) imposed an annual cap of $10,000 effective in the tax year 2018. Married taxpayers who file separate returns are limited to $5,000 per tax return ($10,000 total). The cap applies to all state and local taxes, including real estate and income taxes, inclusively. It’s not a $10,000 limit for each.
What Property Taxes Are Eligible?
The tax code defines the personal property tax pretty simply. It’s imposed annually on certain items of property. U.S. Treasury regulations spell out three criteria for being able to deduct a personal property tax:
The tax must be an ad valorem tax based on the value of the property.It must be imposed annually.It must be imposed on personal property.
The IRS defines personal property as “movable” property, as compared to real estate. Examples include a boat or a car, but also anything movable within your real property such as furniture or artwork.
Claiming the Deduction
You must itemize to claim the deduction for personal property taxes. That means forgoing the standard deduction for your filing status, and standard deductions are pretty significant as of the 2022 tax year. The return you’d file in 2023 would include the following standard deductions based on filing status:
$12,950 for single taxpayers and married individuals who file separate returns$19,400 for those who qualify as head of household$25,900 for taxpayers who are married and file joint returns
Vehicle Registration Fees
Vehicle registration fees are sometimes based partly on the value of the property and partly on other factors. Only the portion that’s based on the value of the property can be deducted for tax purposes. The IRS indicates that a registration fee can qualify as a personal property tax if it’s based at least partly on the value of the vehicle, although the entire fee might not be deductible.
Personal Property Taxes on Business Equipment
The personal property tax paid on equipment used in a trade or business can be deducted as a business expense. Sole proprietors can deduct this tax on Schedule C. The business portion is deducted as a business expense, and the remainder as a personal deduction when the property is used partly for business and partly for personal reasons.
Keeping Good Records
Keep any documents that specify the amount of personal property tax you paid during the year. They might include an annual vehicle registration statement that indicates what portion of the registration fee qualifies to be deducted as personal property tax.
Effect of the Alternative Minimum Tax
The deduction for personal property taxes is an adjustment for calculating the alternative minimum tax (AMT). Personal property taxes are deductible when you’re calculating your regular federal income tax, but they’re not deductible when you’re calculating the AMT. You’re probably liable for the AMT if you earn more than the exemption amounts in 2022:
$75,900 if you’re a single taxpayer$118,100 if you’re married and filing a joint return$59,050 if you’re married and filing a separate return
State Laws Can Vary
Each state sets its own rates and rules for personal property tax assessment, which can vary considerably from one jurisdiction to the next. Local governments sometimes impose their own taxes, as well. IRS rules for the federal treatment of these taxes apply to all, however.
