Property Tax Credits Offered Through State Income Tax Systems

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© TAX ANALYSTS. Reprinted with permission.

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Increases in housing prices and the corresponding increase in property taxes have led to calls for property tax reform. But many state and local governments rely on the higher tax revenues to fund services. Although property taxes can be very burdensome to some lower-income households, many states ease that burden through a variety of property tax relief programs.

Property tax relief programs include homestead credits, so-called circuit breakers, homestead exemptions, and property tax deferrals. While most property tax relief programs are administered through the property tax system, 17 states and the District of Columbia allow homeowners and renters to claim income tax credits. Property tax relief given through the income tax system allows states to offer relief to residents without directly affecting local revenues. However, that can be problematic because people pay property and income taxes at different times, and because some low-income households do not file income tax returns.

Of the 17 states, six have credits that are available only to the elderly or disabled. Most credits are means-tested. The income limits vary from $5,500 (Arizona) to $190,500 (Connecticut). While seven states have set credit amounts or credits that phase out with income, nine states and D.C. refund property taxes only when the tax exceeds a percentage of the homeowner’s or renter’s income. Those programs are called circuit breakers because they kick in when the property tax burden becomes too high relative to income. An additional 26 states offer circuit breakers outside the income tax system.

Six states allow an unlimited credit or deduction, but other states cap their credits between $120 (California) and $1,450 (Wisconsin). Additionally, 14 states have property tax credits that are refundable against the income tax, so people who do not owe income taxes can receive a credit.

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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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