Paying property taxes is almost unavoidable when you own real estate, but some states and localities are kinder than others—particularly when it comes to tax exemptions offered to various demographics, such as older adults.
Older taxpayers often find themselves in a position where their homes’ values have increased so significantly over the years that their tax bills have become almost prohibitive at a time when they're living on fixed incomes. Several tax authorities realize this and have taken steps to ease this particular tax burden for older adults.
What Are Tax Exemptions?
Exemptions don’t have any effect on tax rates, and they don’t typically subtract from your tax bill. As the name suggests, a tax exemption makes certain income, assets, or a portion of those income and assets free from taxation.
In the case of income taxes, exempt income is not included in your taxable income. In the case of property taxes, your state might freeze the value of your home, on which property taxes are based, and the balance of its value over this amount isn't subject to taxation as property values rise. Value over this amount is "exempt." Some states reduce the value of your home that's subject to taxation by a percentage or dollar amount.
Property taxes are imposed at state, county, and local levels. This is one area of taxation that the Internal Revenue Service (IRS) doesn’t have a hand in, but that can be both a good and a bad thing. Blanket, coast-to-coast rules exist for federal taxes, but property tax rules can vary considerably from state to state. They can even differ from one city to the next within the same county.
Some similar regulations and provisions apply in most jurisdictions and many states do have some statewide rules.
How Are Property Taxes Calculated?
Understanding property tax exemptions begins with getting a handle on how these taxes are calculated, and it all starts with an assessment.
Your local tax authority will send someone to your property to appraise it and tag it with a market value based on things like comparable sales in your area and any amenities that you might have added. Your area’s tax rate is then applied to this value. For example, your annual property tax would be $7,500 if the assessor says your home is worth $250,000, and your locality assesses the tax at a rate of 3%.
How to Qualify for a Tax Exemption
Of course, there are qualifying rules for all these tax breaks, and the first of these is your age. As noted, these exemptions are generally reserved for those who are age 65 or older. Only one spouse must typically be 65 or over if you’re married and you own your property jointly.
New York will allow you to continue claiming your exemption if your spouse was over 65 but is now deceased. Texas will do this as well, but only if the surviving spouse is age 55 or older.
Age 65 is by no means a universal rule, however. It’s just 61 in Washington State, and New Hampshire will increase your exemption over the years as you age, sort of like giving you a birthday present each year, although you do have to be at least age 65.
Many locations require that you’ve owned your home for a prescribed period of time. It’s 12 months in New York, but if you qualified at your previous residence, you can carry that period of ownership over to your new home. Cook County, Illinois, has a similar rule.
And you must live in the property. It must typically be your residence. New York offers a slim exception to this rule if you must move into a nursing home, provided that you still own your home and your co-owner or spouse still lives there. But exemptions rarely apply to investment, commercial, or rental properties.
Many locations set income requirements as well. If you earn too much, you won’t qualify, or at least the amount of your exemption will be reduced. And these limits can be stringent in some locations, often in the $20,000 to $30,000 range. Some areas in New York will allow you to deduct the cost of prescription drugs and other medical expenses from your income to help you qualify.
States With Property Tax Exemptions for Older People
Numerous states and cities give a special nod to older adults when it comes to property taxes, but some are more generous than others. New York, Anchorage, Honolulu, and Houston are among the kindest.
New York’s Senior Citizen Exemption is 50% of your home’s appraised value, but you must be age 65 or older and have an annual income of no more than $29,000 as of 2020. If you’re lucky enough to live in this state and you qualify, your $7,500 tax bill on a $250,000 home just dropped to $3,750, because your home’s taxable value is cut in half to $125,000.
Anchorage, Alaska offers a dollar amount exemption to seniors—$150,000 off the appraised value of your home as of 2020. Here, you would pay only $3,000 annually on a property valued at $250,000 at a 3% tax rate: $250,000 less $150,000 comes out to $100,000 times 3%.
The senior exemption is even better in the Houston area—$160,000 plus a 20% reduction off home values for all homeowners as of 2020. The vast majority of seniors living in this part of Texas do not have to pay property taxes, but you must be at least 65 years old, and your Harris County home must be your primary residence.
Honolulu comes close with an exemption of $120,000. It increases to $140,000 in 2020 thanks to 2019 legislation. It, too, applies to seniors age 65 or older.
Most states’ dollar exemptions are considerably less.
The senior property tax exemption is just $8,000 in Cook County, Illinois, and this is actually an increase, up from $5,000 in 2018. And Cook County does things a bit differently, so it's technically not an "exemption," but it's a bit of a tax break all the same. It isn’t subtracted from your home’s value, but rather it's multiplied by the tax rate, and then this amount is subtracted from your tax bill. At a tax rate of 3%, you can deduct just $240 from the second installment of your annual tax bill.
Then there’s Boston. This city offers a meager $1,000 "Elderly Exemption 41C," but you can't claim it in 2021 if it would make your tax bill less than what it was in 2020, and you have to turn 65 by July 1. You must have lived in Massachusetts for 10 years or have owned the property in question for five years. Qualifying incomes are capped at $24,834 in 2021 if you're single, or $37,251 if you're married. The value of everything else you own, not counting your property, cannot exceed $40,000 if you're single, or $55,000 if you're married.
Can You Claim Multiple Tax Exemptions?
Almost all states offer more than just one kind of property tax exemption. It’s sometimes possible to combine your property tax exemption with other exemptions that are available in your area to help you control that tax bill.
In some states, your senior exemption can be applied more than once if you’re taxed on multiple levels, such as by the county and by your city as well. Illinois lets you combine your senior exemption with its regular homeowner's exemption.
New York is generous in a lot of ways, but if you own property here and you’re disabled in addition to being age 65 or older, you must choose between the senior exemption and the exemption for disabled homeowners. You can’t double-dip. You can, however, pair the senior exemption with other partial exemptions, such as those available for veterans and clergy members. The STAR exemption applies to school taxes.
If you qualify for New York’s Senior Citizen’s Exemption, this automatically qualifies you for the state’s STAR exemption as well.
Best States Overall for Property Taxes in 2020
A hefty exemption might be nice, but you could receive about the same relief as someone living in an area with low property taxes, low assessed values, and just a modest exemption if property tax rates and home values are exceptionally high where you live. Tax-Rates.org provides a comprehensive list of states' median property tax rates. The 11 states with the least expensive property tax rates as of 2020 are:
- Louisiana: 0.18%
- Hawaii: 0.26%
- Alabama: 0.33%
- Delaware: 0.43%
- District of Columbia: 0.46%
- West Virginia: 0.49%
- South Carolina: 0.50%
- Arkansas and Mississippi: 0.52%
- New Mexico: 0.55%
- Wyoming: 0.58%
These are state-wide median rates, not actual tax rates in any jurisdiction. Half of all property taxes are higher that the rates cited, and half are less.
But it can be relative. Some states have low property tax rates, but they impose a very high income tax rate or they might have prohibitive sales taxes. The average home value in others is comparatively low, which might make them better retirement choices overall.
The Bottom Line
Property taxes are obviously not a one-size-fits-all calculation. It all comes down to where you live. It’s always best to check with the tax assessor in the area where you own property so you'll know exactly what’s offered there and how you can qualify. And keep in mind that these rules can change yearly.
Frequently Asked Questions (FAQs)
What are property taxes?
Property taxes are taxes you pay as a property owner. Your local government sets the property tax rates, which are based on your property's assessed value. These taxes typically fund schools, first responders, and community amenities like libraries and pools.
When are property taxes due?
Your local government sets the property tax due dates. Property taxes may be due once or twice per year. If you're paying a mortgage on your home, your property taxes may be paid out of an escrow account. The holder of your escrow account will typically get a copy of your property tax bills so they can be paid on time. You can contact your local tax authority for more information.