Learn About the Personal Property Tax Deduction
Certain state taxes are also eligible for a federal tax deduction
A personal property tax is imposed by state or local tax authorities based on the value of an individual’s personal property. This is a tax that's imposed on movable property, such as the value of a car, and is 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, to a point. This deduction was unlimited until the Tax Cuts and Jobs Act (TCJA) of 2017 imposed an annual cap of $10,000. Married taxpayers who file separate returns are limited to $5,000. This cap affects all state and local taxes, including real estate and income taxes.
You can still take the personal property tax deduction, but it might not be as much as it was in years past.
State Laws Can Vary
Each state sets its own rates and rules for personal property tax assessment, and they can vary considerably from one jurisdiction to the next. Local governments sometimes impose their own taxes as well. But IRS rules for federal treatment of these taxes apply to all.
What's Eligible to Be Deducted as Personal Property Tax?
The tax code defines personal property tax pretty simply: "The term 'personal property tax' means an ad valorem tax which is imposed on an annual basis in respect of personal 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.
- The tax must be imposed annually.
- The tax must be imposed on personal property.
The IRS defines personal property as "movable" property, as opposed to real estate, which is immovable. Examples include planes, boats, RVs, and motorcycles. If you're charged the tax only once when you purchase the property, it's excluded because it fails to meet the "imposed annually" test.
Claiming a Deduction for Personal Property Taxes
In addition to the $10,000 federal cap for the deduction, you must also itemize to claim it. This means forgoing the standard deduction, which is pretty significant in 2019: $12,200 for single taxpayers and married individuals who file separate returns, $18,350 for those who qualify as head of household, and $24,400 for those who are married and file joint returns.
You can't claim the standard deduction for your filing status and itemize other deductions, too. So it only makes sense to claim the personal property tax deduction if the total of all 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 states in Publication 17:
"A tax...can be considered charged on personal property even if it is for the exercise of a privilege. For example, a yearly tax based on value qualifies as a personal property tax even if it is called a registration fee and is for the privilege of registering motor vehicles or using them on the highways. If the tax is partly based on value and partly based on other criteria, it may qualify in part."
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 such taxes on Schedule C. If personal property is used partly for business and partly for personal use, the business portion is deducted as a business expense and the remainder as a personal deduction.
Keep any documents that specify how much personal property tax you paid during the year. This might be an annual vehicle registration statement that indicates what portion of the registration fee qualifies to be deducted as personal property tax.
The Impact of the Alternative Minimum Tax
The deduction for personal property taxes is an adjustment item for calculating the alternative minimum tax (AMT). This means that personal property taxes are deductible when calculating your regular federal income tax, but they're not deductible when you're calculating the AMT.
Taxpayers who are impacted by the AMT will obtain little or no reduction in their federal tax liability by using the personal property tax deduction.
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.