A personal property tax is imposed by state or local tax authorities based on the value of an item of qualifying property. The tax is imposed on movable property, such as automobiles or boats, and it's assessed annually. It's also called an ad valorem tax.
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 planes, boats, RVs, and motorcycles.
The tax is excluded from deductibility, because it fails to meet the "imposed annually" test if you're charged only once when you purchase the property.
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 2020 tax year. The return you'd file in 2021 would include the following standard deductions based on filing status:
- $12,400 for single taxpayers and married individuals who file separate returns
- $18,650 for those who qualify as head of household
- $24,800 for taxpayers who are married and file joint returns
You can't claim the standard deduction for your filing status and also claim itemized deductions, so it only makes sense to claim a property tax deduction if the total of all of your itemized deductions for the year exceeds the amount of your standard deduction.
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
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 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 2020:
- $72,900 and you're a single taxpayer
- $113,400 if you're married and filing a joint return
- $56,700 if you're married and filing a separate return
Taxpayers who are impacted by the AMT will obtain little or no reduction in their federal tax liability by claiming the personal property tax deduction.
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 federal treatment of these taxes apply to all, however.
Frequently Asked Questions (FAQs)
What is considered personal property for tax purposes?
Personal property tax is placed on items that are considered 'moveable assets.' This will include belongings such as a car, boat, mobile home, or plane.
When should I itemize?
It's a good idea to itemize deductions if they are greater than the standard deduction. For example, if you're filing married and your tax deductions total more than $24,800, you should take an itemized deduction.