Source: Federal Reserve Bank of New York.
Taxes: they're annoying, but we pay them -- grudgingly -- nonetheless. Federal, state, and local governments need tax revenue to fund social programs, support infrastructure, and pay state and government workers' wages. But sometimes the amount taken out of our wallets may seem mind boggling.
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Despite the focus on federal income taxes, it's actually property taxes that tend to be the silent killer. Based on findings from the National Association of Homebuilders that used data from the U.S. Census Bureau, between the first quarter of 2014 and the first quarter of 2015, property taxes were the primary source of revenue for state and local governments, contributing a 39.5% share. As a whole, property tax revenue has essentially doubled since 2000 for states, while the percentage of property tax revenue as a share of state revenue has fallen from a peak of 45% in 2010 to slightly below 40% today. In total, property taxes collected by states totaled $500 billion over the trailing year.
By comparison, state sales tax and individual income tax accounted for 28% each. Corporate taxes make up the final 4.5%.
Source: Flickr user Mark Moz.
What goes into determining your home's property tax?What exactly goes into determining the property tax you pay on your home? For starters, the taxing authority needs a base value for your home, which is determined by an assessment, reassessment, or the sales price of your home if it was recently purchased. For assessment and reassessment purposes, the taxing authority will use comparable homes in your area to calculate a property value. In addition, if you remodel your home -- by adding new rooms or making substantive improvements -- you'll likely require a reassessment.
Once a home value is established, the taxing authority applies the set tax rate for the city or county you live in (which is determined by officials, as well as school boards, fire departments, and utility commissions) and multiplies it by your assessed home value to derive your property tax.
There are still a couple of ways that the amount you pay in property taxes could drop from this initial number. First, certain states offer exemptions for homeowners -- especially seniors. Although it can vary from state-to-state, most offer exemptions from property taxes up to a certain dollar amount (known as a homestead exemption). Some states also offer property tax caps, credits, or in some cases deferrals for seniors.
On top of possible regulatory relief, if a homeowner disagrees with their assessed home value they can appeal to their local tax authority to reassess the property. Regardless of the state of the economy, it's never a bad idea to at least consider getting your home's value reassessed.
Source: Pictures of Money via Flickr.
Property taxes in these states will hurt your pocketbookThe biggest component that'll determine what you pay in property taxes just might be where you live.
Mean property tax rates on owner-occupied homes vary widely across the United States according to data from the Tax Foundation. Hawaii and Alabama, for instance, have the lowest mean property tax rates in the U.S. at 0.28% and 0.43%, respectively. A low property tax rate can be particularly beneficial during retirement as it means you'll get to keep more of your money rather than divvying it out in taxes. It can even be helpful while you're working, since it means you can potentially sock away more money for your retirement.
But the opposite can be true, too. High property tax rates can give homeowners (especially new homeowners) the kind of shock that isn't appreciated. A high property tax can cause senior citizens to burn through their nest eggs faster than they would care to, and it can potentially reduce the amount working Americans can put away for retirement.
What states have the highest mean property tax rates in the nation, you wonder?
- New Jersey (2.38%)
- Illinois (2.32%)
- New Hampshire (2.15%)
- Connecticut (1.98%)
- Wisconsin (1.96%)
As the Tax Foundation notes, property taxes for New Jersey and Illinois merely match the high state and local taxes that citizens pay throughout the state. In New Hampshire, high property taxes are in place to make up some of the revenue lost to other tax reforms within the state.
Property values also have a lot of bearing. The higher a property's value, the more a homeowner could wind up paying in annual property taxes. For instance, Hawaii's property tax rate of 0.28% might be microscopic, but its average median home sale price of $431,000 per Truliabetween June 2015 and September 2015 is considerably higher than the national average.
However, Illinois, which has the second-highest property tax in the country, ranks in the middle in terms of median home sale price ($210,000) over the same three-month period. New Jersey, though, ranks high up the list, with a median home sale price of $320,000. It means the average New Jersey resident is likely forking over in excess of $7,600 per year in property taxes. Thus, while neither Illinois nor New Jersey offers favorable property tax rates, typical New Jersey residents are much worse off.
In sum, where you choose to live could wind up having a big effect on your wallet. When making that choice -- especially in retirement -- make sure you take into consideration the value of the home you're buying and the local property tax rate.
The article Property Taxes in These 5 States Can Be a Killer originally appeared on Fool.com.
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