Learn About the Personal Property Tax Deduction
Paying State Taxes Can Make You 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, such as a tax that's imposed on the value of a car and assessed as part of the annual vehicle registration fee. 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, but don't get too excited by that just yet. This deduction used to be unlimited until the Tax Cuts and Jobs Act came along, imposing an annual cap of $10,000. Married taxpayers who file separate returns are limited to $5,000.
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," according to Internal Revenue Code section 164(b)(1).
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.
If you do decide to itemize, this deduction goes on line 7 of Schedule A, which you must file with your tax return.
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
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 on the taxpayer's personal Schedule A.
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.