Personal Property Tax Deduction: You’re Doing It Wrong 1

Hello everyone! I’ve had a nice break from writing about taxes this past month, but I’m finally ready to get back on that horse (though writing about taxes would probably be better described as getting on a mule or, better yet, an ass).

This kind of ass. Just so we're all clear.

This kind of ass. Just so we’re all clear.

I’m picking up where I left off on my personal tax deduction series. If you want to go back to the start, click here.

On the Schedule A list of itemized deduction, one of the many types of deductible taxes is the personal property tax deduction. If you want the official definition of “Personal Property Tax,” the ever popular tax code (Section 164) defines it as “an ad valorem tax which is imposed on an annual basis in respect of a personal property.”

If you’re like me, that definition clears nothing up. Let me take another stab at it. Personal property is basically anything you own that’s not either the ground or something bolted to the ground (those would be real property items). Personal property taxes are taxes you pay on those non-bolted down items every year BASED ON THEIR VALUE. Yes, it’s in caps for a reason. Keep reading.

For individuals, the only personal property tax you’re likely to have is the tax portion of your annual car registration.

Now this is where things get a little tricky. The personal property tax deduction is allowed ONLY on personal property taxes based on the VALUE of the item. That means if your state or county taxes your car based on weight, you’re not allowed a deduction. If they have a flat tax for every car, you’re not allowed a deduction. If part of your registration are road fees or public transportation fees based on where you live rather than the value of your car, you’re not allowed a deduction (at least on that part of the registration expense).

The only way to explain this is to give an example, and since I’m in Colorado I’ll use that. Based on my understanding of Colorado personal property tax law (which, admittedly, isn’t great), Arapahoe County taxes your car based on some percentage of sticker price, which decreases with the age of the car. Adams County, however, taxes based on year, weight, and taxable value of the vehicle. Technically, only the tax based on that last part is deductible.

So how do you actually know what to take as your personal property tax deduction? Well, hopefully, your county will break it all out for you on your car registration.

Here’s a sample Colorado registration. All states will have something different, but it should be similarly broken out.

colorado personal property


Now, if you’re like most people (including me before doing several of these returns), your tendency will be to look at this paper, find the total amount paid ($301.80, in this case) and take that as your personal property tax deduction. Don’t. Again, I’ve seen people do it all the time, but it is wrong, and if the IRS ever bothers to audit you, you’ll have to make up the difference, likely with interest and penalties.

I’m guessing you’ve been able to figure out the correct deductible amount, since it’s highlighted. Let me explain a bit. This is an Arapahoe county personal property tax statement, so I know that the tax portion is based on the value of the car. All those fees are either per person, based on weight, or based on where I live, so they are not deductible.

I’ve seen other counties whose registration is almost completely based on fees. So that new car with $700 in registration has a $5 personal property tax deduction. Which, even at the highest tax rate, is only a $2 savings. That’s not even enough for a slice of pizza at Costco after you factor in sales tax.

As for the other fees, if you’re in doubt in your situation, you should check with your local taxing authorities. Their deductibility really depends on how they do it. Which, yes, totally sucks.

A note for Colorado people: I really don’t know what the “Prior O.T.” is. According to a Google search, it means “Prior Ownership Tax,” yet none of them give a good explanation what it means. Larimer County says they’re deductible on the Federal return, so if you live there you can take the deduction. You’re probably safe elsewhere in Colorado, too. If you actually know what it is and what it’s based off of, please let me know in the comments below.

Okay, time for a quick summary. According to Federal Tax law, your personal property tax deduction is ONLY for annual taxes based on the value of the property. If you take anything else, you risk having the IRS come in an disallow it. If I were signing your return, I wouldn’t take that risk. Look for the “ownership tax” or “property tax” on your car registration, and record that as you itemized personal property tax deduction.