Posted: 2:56 pm Fri, August 31, 2012
By Bob and Donna McWilliams
By the end of 2012, every homeowner in the state of Maryland must ?reapply? for something called the Homestead Tax Credit. If you?ve already done this, there?s nothing to worry about. If you haven?t, it could cost you thousands in higher real estate taxes. During the next couple of columns, we?ll take you through what the Homestead Tax Credit means and how to make sure you don?t pay more than is necessary.
Every three years, one third of all property is assessed. For our home in Annapolis, this was our year. Whenever the new assessments come out, there?s a good deal of confusion about what the numbers mean. And with the fairly new phenomenon of ?declining? assessments, many homeowners are justifiably confused about why their real estate taxes keep going up, even though assessments have gone down. Consequently, the first step in understanding the Homestead Tax Credit requires a basic knowledge of how real estate taxes are calculated.
Homeowners pay real estate taxes to the state, county and, in certain municipalities, like Annapolis, they also pay real estate taxes to the city. There are two components in how the government figures out what you owe. The first is your assessment, which is what the state has determined is the value of your home.
The second part of calculating your taxes is the tax rate. There are different tax rates for the state and individual counties or municipalities. Right now, the Maryland state tax rate is 11.2 cents for every $100 of assessed value. If you live in Anne Arundel County, you add to that 91 cents for the county portion, resulting in a total of $1.022 per $100 of assessed value. However, if you live in Annapolis, your tax rate is higher. You pay the same 11.2 cents to the state and your county tax is reduced to 54.3, but you also pay an additional Annapolis city tax of 56 cents. That brings the tax rate for city residents to $1.215 per $100 of assessed value, 19 percent higher than what?s paid in the county.
The state tax rate of 11.2 cents is unchanged versus last year. But both Anne Arundel County and Annapolis increased their tax rates by 3 cents. On the surface, one would think that if assessments declined in Annapolis by 15 percent and the tax rate only went up by 3 cents or 5.7 percent, the result would be lower taxes. Well, that?s not going to happen. The tax bill for Annapolitans is going to go up, and go up rather significantly. The reason is something called the Homestead Tax Credit. Here?s how that works.
Basically, the Homestead Tax Credit limits how much your ?assessed value? can increase in any given year. In Anne Arundel County, the limit is 2 percent. For the state and Annapolis, the limit is 10 percent. Because of this, some of the very large assessed value increases of a few years ago are still phasing in, and even though the new assessed value of your home may have gone down, the assessed value used to calculate your taxes is still going up. This phenomenon is spelled out in the bill passed by the Annapolis City Council to increase the tax rate. In that legislation, it indicates that the total assessed value in the city was projected to increase by 2.9 percent. So, to keep the amount of money flowing into the city coffers unchanged, the tax rate would actually need to be reduced from 53 cents to 51.49. Instead, the city increased the tax rate to 56. The result is an additional $2,966,945 in real estate taxes that will be paid by the citizens of Annapolis.
In the end, the Homestead Tax Credit essentially creates a lag time with respect to paying taxes on what the state considers to be the full market value of your home. But when the new assessments come out and people read the headlines about big assessment reductions, it leaves many scratching their heads when the tax bill continues to go up. The confusion is further complicated by the fact that some homeowners qualify for the Homestead Tax Credit and some don?t. Plus, the amount of the credit varies across the state, and an individual homeowner can have one Homestead credit for his county/state taxes and a very different credit depending on whether he lives in certain municipalities.
For example, the assessed value of our home used by Annapolis to calculate real estate taxes is more that ?twice? the amount of what is used by Anne Arundel County. This is because the Homestead Credit for Anne Arundel County is, in effect, five times higher that the credit provided by Annapolis. Subsequently, if our property were located just outside the Annapolis city limits, our real estate taxes would be 40 percent lower. Part of this is because of higher Annapolis tax rates, but the bulk of it results from the substantial difference in Homestead Tax Credits.
Given the importance of the Homestead Tax Credit, there?s something you should be aware of. Granting the credit used to be automatic. Then a few years ago, the Maryland legislature changed the law, making it necessary for homeowners to make a one-time application for the credit. So, it?s very important that you make this application. To be eligible for the credit, the house must be your principle residence; investment properties do not qualify. For those who just received their new assessment notice in the mail, an application for the Homestead Tax Credit was included. Otherwise, you can apply online at https://sdathtc.resiusa.org/homestead/.
The somewhat convoluted and confusing method for determining real estate taxes can send your head spinning. Plus, the additional element of the Homestead Tax Credit can send makes it all the more difficult to understand. But the bottom line is that, by the end of 2012, you must make reapplication for the Homestead Tax Credit. Otherwise, you could be hit with a tax bill that will be literally thousands more than you legitimately owe.
In next week?s column, we?ll talk more about the Homestead Tax Credit and help guide you through the process of making application.
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