Property Tax Circuit Breaker Relief

18 states offer this type of relief as of 2018

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Lower-income taxpayers nationwide pay a larger percentage of their income in property taxes than higher-income taxpayers. It works out this way because property taxes are based on the value of a home and not on income. They're disconnected from an owner's ability to pay.

Income taxes, on the other hand, are completely connected to income—a taxpayer who loses her job will find that her income taxes go down because she's earning less. But her property taxes will remain the same, even though her ability to pay those taxes has decreased. Residential property taxes are said to be "regressive" for this reason.

Is This Fair?

The Institution of Taxation and Economic Policy (ITEP) assessed the fairness of state and local tax systems and found that "virtually every state tax system is fundamentally unfair, taking a much greater share of income from low- and middle-income families than from wealthy families."

ITEP found that state and local taxes are the inverse of income. The lower one's income, the higher one's overall effective state and local tax rate. The absence of a graduated personal income tax and over-reliance on consumption taxes exacerbate this problem.

2 Options for Tax Relief

Elected officials in each state have two broad-based choices when they attempt to enact property tax relief for low- and middle-income families. They can implement an across-the-board tax cut for taxpayers of all income levels. A homestead exemption is an example of this approach. It usually exempts a flat dollar amount or flat percentage of home value from property tax.

Officials might also provide for tax breaks targeted at only low- and middle-income families.

The Property Tax Circuit Breaker

One increasingly popular type of targeted tax break is the circuit breaker. A property tax circuit breaker program can be broadly defined as any property tax relief that limits or reduces property taxes for certain individuals. Circuit breaker programs are usually property tax exemptions or credits specifically enacted for low-income, elderly, or disabled property owners.

The term derives its name from an electrical circuit breaker which shuts off the electrical current when a system is overloaded. Similarly, circuit breaker programs kick in when too much of a taxpayer's income would be spent on property taxes. The circuit breaker reduces the overload.

Eighteen states and the District of Columbia adopted this form of tax relief as of 2018, but half of them target only the elderly and/or disabled based on the theory that these individuals earn less. Income limits range from a high of $147,000 in Vermont to a negligible $5,500 in Arizona.

An additional 13 states offer other forms of property tax relief based on income.

The Advantages of Circuit Breakers

Circuit breaker programs are designed to reduce the property tax burden only of low- and middle-income families so they're much less expensive for the state than across-the-board tax cuts. Additionally, they introduce the "ability to pay" criteria because they respond to income level. They reduce property taxes for these groups to a manageable level.

The Disadvantages of Circuit Breakers

The biggest disadvantage of these programs is that you have to know about them to get the tax relief they offer. A circuit breaker is only granted to taxpayers who apply, unlike homestead exemptions which are often automatic, across-the-board tax cuts.

Contact your local taxing authority if your income is struggling to keep up with your property tax burden. This is your best—and often your only—option to find out what's available in your location. Some states get rather creative with their property tax breaks, so you might find that other help is available even if yours does not offer a circuit breaker program...but you have to ask.

Tax laws change periodically and the above information might not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice in your location. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.