Property Taxes 101
Single-family home values are on the rise across the country, which is great for those looking to build long-term wealth and equity. However, it also means the amount paid in property taxes is increasing — and that’s a pinch no homeowner wants to feel. In some states, taxpayers are forking over more than $10,000 in property taxes yearly. Texas is seeing these astronomical figures and Texas homeowners are feeling the pain: Texans face the sixth-highest property taxes in the U.S. Thankfully, there is a Texas property tax appraisal increase limit in place to help cap the yearly burden.
In The Lone Star State, there are more than 4,100 municipal units with the authority to impose and collect taxes. That’s a lot of hands reaching into your pockets for your hard-earned money. The appraisal increase cap limits yearly exposure, but only to a degree. To reap the full benefits, homeowners must ensure they’re paying a fair property tax in the first place. Unfortunately, many taxpayers are overpaying and they don’t even know it.
Read on to learn what the property tax market value increase limit is in Texas, why it’s important to know how much you’re paying in taxes, and how varied tax rates can impact your total property tax bill.
Regardless of where you live, taxes are an essential source of revenue for federal, state, and municipal entities. The dollars collected help pay for public schools, police and fire protection, health care services, roadway upkeep, and more.
When it comes to property taxes, the amount owed is an assessed percentage calculated by multiplying the effective tax rate in your area by the value of your property. Because both tax rates and property values fluctuate year to year, property tax bills can be a scary unknown. Fortunately, in Texas, if you have a homestead exemption in place, your property tax appraisal increase limit is capped at 10% year over year, which helps to protect you from large annual increases in property tax. If you don’t have a homestead exemption, your property taxes are uncapped which can be painful in a strong real estate market.
The cap on tax appraisal increase limits offers a measure of protection to homeowners because appraisal values have a compounding effect over time. That is, the previous year’s appraisal value is the basis for the current year’s valuation, which then becomes the basis point for the next year’s appraisal value. And so on and so forth.
So, even in an instance where overall housing markets are reflecting a YoY value increase as high as 20%, in Texas, the appraised value of your owned property can only increase 10% in that year. And that can lead to significant savings on your property tax liability. Now, before we look more closely at property taxes, let’s review the different types of taxes in the U.S.
Across the country, there is a laundry list of services to fund, students to support, potholes to fill, and communities to keep safe, all with money collected via taxes. While the U.S. tax system has many complexities — different taxes are paid at different times; some are deducted from paychecks and others are levied at cash registers — the basics are pretty simple. Here are the seven taxes paid by Americans:
Income taxes are charged at the local, state, and federal levels. Income tax structures are varied and the amount paid is based on several factors, such as marital status and total income. In Texas, there is no personal income tax.
Sales taxes are levied on goods and services purchased. Typically, these taxes are calculated as a percentage. In Texas, the state sales and use tax rate is 6.25%. On top of that, Texas cities and counties can impose an additional sales and use tax of up to 2% for a combined maximum rate of 8.25%.
Similar to sales taxes, excise taxes are charged on goods — a very specific set of goods. Gasoline, liquor, beer, and cigarettes are examples of goods that typically incur an excise tax when purchased.
There are two payroll taxes: Social Security and Medicare. Both taxes are paid by both employees and employers. Tax amounts are deducted directly from a worker’s paycheck, and the totals can be tracked via paystubs.
As defined by the IRS, an estate tax is “a tax on your right to transfer property at your death.” This controversial tax, often seen as a penalty for dying, is levied on items like cash, stocks, and real estate. Fortunately, many Americans avoid this tax, as estates falling below a reasonably high threshold are exempt from paying.
Similar to estate taxes, gift taxes are incurred when something of value is transferred. The difference is gift taxes involve two individuals who are alive. Additionally, exemption levels are far lower with the gift tax, as any value greater than $15,000 in 2021 and $16,000 in 2022 is taxable.
Property taxes are taxes paid by an individual on owned property. Typically noted as a percentage, these taxes are assessed based on an appraised market value of the said property. In Texas, property taxes are assessed locally, not by the state.
Reliance on revenues collected from property taxes varies from state to state. Because Texas does not have a state income tax, the revenue collected from property taxes carries a heavier burden when it comes to funding for local libraries, emergency medical services, and transportation infrastructure. So how are property taxes in Texas determined?
Appraisal districts in each county determine a fair market value for every taxable property in its jurisdiction as of January 1, and this appraisal must occur at least once every three years. Market value, defined most simply as the cash transfer price of a property for sale on the open market, is appraised by one of three common approaches:
· The comparison approach looks at the sale price of recently sold, similar properties, adjusting for differences as necessary.
· Using data science to estimate the present value of future proceeds, the income approach attempts to determine what an investment property is worth today, assuming revenue streams in the future.
· The cost approach, quite literally, factors in the cost to replace a property improvement (think: a house) with one of equal value and utility.
An advantage of Texas giving its local-level authorities the power to regulate property taxes is that each community therefore levies the taxes required to meet its specific funding needs. On the flip side, however, is that without state oversight rates vary widely from county to county — and even vary from city to city within a county — effectively penalizing residents of certain locales. According to the Tax Foundation, relative to your local community, higher property taxes are typically paid in places with higher housing prices.
This variation makes the Texas property tax appraisal increase limit even more important for those faced with the highest rates. As a case study, let’s look at two specific counties out of the 254 total counties in Texas. We’ll represent one of the highest and one of the lowest property tax burdens, and then compare that to the overall state average.
· Fort Bend County — As reported by the Fort Bend Independent, the average homeowner here pays more than $5,500 in property taxes, based on an average effective tax rate of 2.22%. This means the median property price is around $250,000.
· Borden County — On the opposite end of the spectrum, the average yearly property tax bill here is almost as low as $350 thanks to a median property value of around $105,000 and an average effective property tax rate of 0.34%. It’s interesting to note the population in Borden County is approximated at only 600, which suggests the need for services and the dollars needed to fund available services, is less.
· Texas Average (based on available 2019 data) — Landing “in the middle,” the state median home value is $172,500 with an effective real estate tax rate of approximately 1.8% for an annual property tax bill of $3,099.
From as little as $350 owed to a bill over $15,000, property taxes cover a wide range in Texas. Unfortunately, many heads of households blindly pay the bill when it’s received without pausing to ask, “Is this how much I should be paying?” or “How can I lower my property tax bill?”
If there’s one easy-to-understand takeaway, it’s this: Yes, a percentage limit on yearly appraisal increases is an instrument to protect homeowners. However, because appraisal values have a compounding effect over time, it’s important to ensure you’re paying a fair property tax from day one. And even if you’re unsure as to whether or not you’re overpaying, it’s worthwhile to protest your assessment and your bill.
As you can see, the county-specific intricacies across the great state of Texas add a lot of complexity to understanding the ins and outs of property taxes. Knowing there’s a Texas property tax appraisal increase limit is a good start, however, executing a successful protest of your provided assessment on your own is an entirely separate can of worms. This means there’s a good chance that you, as a homeowner, are paying more in property taxes than you need to. And, like most, you probably have no idea where to begin in pursuit of protesting your appraisal.
If you are thinking of trying to fight on your own behalf, you’ll need to acquire, analyze, and adjust market data; choose the correct comparables; submit evidence to the county; negotiate with a licensed appraiser; and attend review board meetings. That all requires hours and hours of your time over multiple months — every year. Talk about overwhelming.
At Home Tax Shield, our team of local, experienced professionals takes your home through the entire process. Our data-driven, AI-powered technology monitors your property and your local real estate market to ensure you end up with a fair tax value each year, giving you more money in your pocket and the peace of mind to rest easy. Sign up today, and lower your taxes in one easy step.
Jan 20th 2022
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