By Staff
Editor's note: On Feb. 28, 2006, Niles Community Schools district voters will be asked to approve a bond issue to fund the construction of a new high school and make major renovations to the remainder of the district's school buildings.
The school district had to choose between an option of renovating existing buildings or asking for the same millage and constructing a new high school, as well as funding needed repairs to facilities. Because the millage amount was the same, the school board is asking voters to approve the option that will include the new high school.
The issue is one of significant importance to the Niles community. The Niles Daily Star begins here a series of articles attempting to answer voters' questions about the school district's plans and their impact on residents' tax bills and students' education.
Niles' Bill Haslett of Haslett and Gaynor CPA answered some questions about the potential tax impact of the bond issue.
Before we begin, in February 2006 voters in the Niles Community School District will be asked to approve a millage increase to build a new high school. The increase would be seven mils.
Now might be a good time to review what such an increase would mean for property owners, and especially to review whether the Michigan Homestead Property Tax Credit might be of help.
I am inserting this paragraph to apologize to all of the authors of tax articles I have belittled because they left out certain details or exceptions. I now realize that an article, or even a series of articles, cannot hope to cover all of the if's, and's and but's. I will try to cover the basics.
How will this effect my tax bill?
I usually don't like to skip to the end of the book, but in this case I will give you the bottom line first, assuming the millage request passes and everyone's taxes go up.
Some homeowners will have 100 percent of their property tax increase refunded to them by the State of Michigan. This group would tend to include seniors with limited incomes.
Some homeowners will have part of their property tax increase refunded to them by the State of Michigan. This group would include some seniors and others who qualify.
Some homeowners will not have any of their property tax increase refunded to them. This group would tend to include those with higher incomes.
How do I know which group I fall into?
Simple, right? Maybe, but the trick is to determine to which group you belong. Unfortunately, I haven't been able to figure out how to do that without dealing with some technical issues, so hang on and let's go.
The first step is to figure out what seven mils means to you. It was reported that the increase would be $350 per year, or approximately $1 per day. This would be true for a homeowner who recently bought their home for $100,000. The “taxable value” of their home would be $50,000, and since a mil is $1 of tax for each $1,000 of taxable value, seven mils would equal $350 of tax (7 x $50,000/1000).
You may have noticed that I slipped in the term “taxable value” and casually mentioned that the taxable value of a recently purchased $100,000 home would be $50,000. As Lee Corso would say, “Not so fast.”
Now is the time for all of you to go and get your most recent property tax notice, probably summer 2005 billing. Go ahead, I'll wait.
OK. The notice should show three values - taxable, equalized and assessed. The assessed value is one-half of the property's market value, determined by the local assessor.
The equalized value (also known as the state equalized value, or SEV) is the same as the assessed value unless the County thinks the local assessor is wrong.
Why is taxable value important?
The taxable value is what determines your property taxes (times the millage, divided by 1,000). The taxable value is probably less than the equalized value, because of Proposal A. Remember that? It was passed 1994 and said that the taxable value cannot increase any faster than the rate of inflation or five percent per year, whichever is less.
This means that even if your home increased in value by eight percent in a certain year, your taxable value did not go up by more than five percent (or even four percent or three percent if that were the overall rate of inflation). On my block, for those I know have been there since 1994, the average taxable value is 72 percent of the assessed value (public information).
Also, I don't think any of my neighbors would be willing to sell me their house for two times their assessed value, indicating that the assessments may be low.
The “catch” with Proposition A is that when a property is sold, the taxable value is what is called “uncapped” and becomes equal to the equalized value, usually one-half of the selling price.
What this all means is that the longer you have been in your house, the more likely a seven mil increase would not cost you as much as if you just bought your house. Since seniors as a group tend to move less often, they will as a group be less impacted by a millage increase.
So, if someone buys the house next to you and pays $100,000 for it, their assessed, equalized and taxable value might be $50,000 and a seven mil increase will cost them $350. Your house might also be worth $100,000, but if you have been there for a long time, your assessed value might be 40,000, your taxable value might be $29,000, and a seven mil increase would cost you $203 per year.
You get the idea. Find your taxable value, divide it by 1,000, and multiply it by seven. That is what a seven mil increase means to you.
Now that you know the dollar amount, we can explore how much of the increase the state or federal government will refund to you. As I said earlier, it could be all of it, part of it, or none of it.
What about Homestead Property Tax Credit?
The primary means of a potential refund is through a refundable credit called the Michigan Homestead Property Tax Credit. The credit is normally claimed in connection with filing a Michigan income tax return, although the credit form can be filed on its own if an income tax return is not necessary. The credit form is MI-1040CR.
The credit is generally available if the property taxes levied on your homestead for a certain year exceed 3.5 percent of your household income.
Some definitions are in order. Sorry.
The credit is refundable, meaning that they will send you the money even if your income tax is zero. A nonrefundable credit can only reduce the tax to zero, but not below.
It is a credit, not a deduction. A dollar of credit is worth a dollar. A dollar of deduction is worth ten to 35 cents.
Property taxes levied for a certain year are the property taxes billed for that year, regardless of when paid. This is different than the property tax deduction on federal Schedule A, which is taxes paid in a year regardless of what year they are for. If you rent, 20 percent of your rent can be considered as property taxes for purposes of calculating the credit.
Property taxes levied do not include interest, penalties, or most assessments.
Your homestead is where you live. You can only have one homestead at a time. Property taxes on rental or commercial properties do not count.
Household income. Ah, yes - household income. What is it? Well, it is not adjusted gross income. It is not taxable income. Rather, it is a concept that attempts to measure the total resources that a household has available to pay property taxes, and if a household pays more than 3.5 percent of its resources for property taxes, that is more than its fair share and the household deserves a break.
Household income therefore includes most items of taxable income and most items of nontaxable income, with a few exceptions. Household income, Social Security, disability compensation, child support, tax-exempt interest, gifts in excess of $300, and inheritances and life insurance proceeds unless they are from a spouse. Items that can be deducted are medicare deducted from Social Security, medical insurance paid, and adjustments to income from your federal return.
Senior citizen example:
Let's say a couple has the following income: Social Security of $20,000 after Medicare deductions, pensions and IRA's of $10,000, and interest and dividends of $4,000. They pay $2,000 for health insurance. Their household income, therefore, is $32,000. 3.5 percent of their household income is $1,120.
The taxable value of their home is $32,000, and the annual millage where they live is 35 mils, so their property taxes are $1,120. Because their property taxes do not exceed 3.5 percent of their household income, they do not qualify for the homestead property tax credit.
If the millage request passes, the millage increases by seven mils and their taxes increase by $224. Because all of the increase is in excess of 3.5 percent of their household income, they qualify for the homestead credit. If either of the couple are 65 or older, deaf, blind, or disabled, they will get a refund of 100 percent of their tax increase, and the new high school will have cost them nothing.
General citizen
example:
If the couple were under 65 and not deaf, blind or disabled, their credit would be 60 percent of the amount over 3.5 percent of their household income, or $134 ($224 X 60%).
This example highlights that if the millage request passes, some who did not qualify for the property tax credit in the past may qualify in the future. We all need to do the math for our own situations to see if the credit applies.
Just a couple of other items related to the credit: the credit is not available if household income exceeds $83,000. The maximum credit is $1,200. If you are blind, are in the active military, are an eligible veteran or an eligible veteran's surviving spouse, an alternative calculation on Form MI-1040CR-2 may result in a larger credit.
What if I itemize my federal taxes?
For those who get no benefit or partial benefit from the Michigan Homestead Property Tax Credit, there is a federal income tax provision that allows a deduction for property taxes paid. In order to take the deduction, you need to be in a situation where you itemize your deductions on Schedule A rather than use the standard deduction.
You will remember from our earlier discussion that deductions are not quite as exciting as credits, but they are still worth something. They are worth the dollar amount of the deduction times your marginal tax rate. Our current federal tax rates range from 10 percent to 35 percent, and your marginal rate is the highest rate you paid on some of your income.
If our person in the $100,000 house pays $350 in additional property taxes because of the seven mil increase, and if they do not qualify for the homestead credit, and if they itemize, and if they have a marginal federal tax rate of 25 percent, they would save $88 in federal income tax, reducing their net cost of the additional seven mils to $262. Hey, at least it's something.
If you have a person who helps you with your taxes, they know this stuff and can help you. The instructions in the Michigan Individual Income Tax booklet have a good discussion on the homestead property tax credit.
Send your questions about the upcoming Niles Community Schools millage vote to Jan Griffey, Niles Daily Star, 217 N. Fourth St., Niles, MI, 49120, or email them to jan.griffey@leaderpub.com.