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Low-income homeowners pay a larger percentage of their incomes in property taxes than high-income taxpayers do, because these taxes are based on the value of a home, not on income. They're disconnected from an owner's ability to pay. One type of targeted tax break for this problem is referred to as a "circuit breaker" program.
A taxpayer who loses their job will find that their income taxes go down, because they're earning less. However, their property taxes will remain the same, even though their ability to pay those taxes has decreased. Residential taxes are said to be "regressive" for this reason.
The Institute on Taxation and Economic Policy (ITEP) assessed the fairness of state and local property tax systems. It found that they're fundamentally inequitable, because they take a much greater percentage of income from low- and middle-income families. ITEP found that the less someone earns in annual income, the more they're likely to pay in effective state and local tax rates.
States have, in general, two ways to give property tax relief for low- and middle-income families. These are known as "property tax circuit breakers" and "homestead exemptions."
A homestead exemption is a broad, across-the-board tax cut for taxpayers of all income levels. It usually exempts a flat dollar amount or flat percentage of home value from the tax.
A tax circuit breaker is any property tax relief that limits or reduces taxes for certain individuals. Circuit breaker programs are often specifically enacted for property owners who have disabilities or low income, or those who are older.
The term gets its name from an electrical circuit breaker that shuts off the current when a system is overloaded. Similarly, circuit breaker programs kick in when too much of a taxpayer's income must go to property taxes. The circuit breaker reduces or eliminates the overload.
There are different types of circuit breaker programs that states can use. The most common are threshold circuit breakers. These are based on your income. Once property taxes exceed more than a set percentage of your income, the tax relief goes into effect. There are different types of threshold circuit breakers:
There are also sliding-scale circuit breakers, which create income brackets for taxpayers. Within each bracket, taxpayers qualify for the same amount of tax relief, regardless of how high or low their property taxes are. In this system, the lowest income bracket receives the highest relief from property taxes. The relief percentages decrease as income rises.
Eighteen states and the District of Columbia have adopted this form of tax relief. Many states also offer assistance only to people who are older and/or to people with disabilities, based on the theory that these individuals tend to earn less.
Circuit breaker income eligibility limits range from a high of $147,000 in Vermont to a negligible $5,500 in Arizona.
An additional 13 states offer other forms of property tax relief based on income, age, and disability. The following homeowners qualify in each state offering at least one of these types of tax relief:
Circuit breaker programs are designed to reduce the tax burden of only low- and middle-income families, so they're much less expensive for the state than across-the-board tax cuts. Additionally, they introduce the "ability to pay" criteria, because they respond to income level. They reduce property taxes for these groups to a manageable level. Circuit breakers and other programs reduce the likelihood that people will be forced out of their homes if they can't pay property taxes.
The biggest disadvantage of these programs is that you have to know about them to get the tax relief they offer. A circuit breaker is generally only granted to taxpayers who apply. Homestead exemptions, on the other hand, are often automatic, across-the-board tax cuts. The Center on Budget and Policy Priorities (CBPP) found that some programs miss two-thirds of those who qualify, because they don't know they qualify or how to apply.
Contact your local taxing authority if you're struggling to keep up with your property tax burden on your income. This is your best—and often your only—option to find out what's available in your location.
Some states get rather creative with their property tax breaks, so you might find that other help is available even if yours doesn't offer a circuit breaker program—but you have to ask.
Many states, cities, and counties offer their own property tax relief. Contact both your state and local departments of revenue to find out which programs you are eligible to apply for.
Property taxes are generally based on the assessed value of your home and property. A government assessor assigns a value to your property, and you are taxed a certain percentage of that value per year.
