February 20, 2009

How to Calculate Property Tax Liability

The correct answer is C: $2,610.00.


“Millage,” or “mill rate,” is a term some states and localities use to calculate property tax liability. Properly tax itself is sometimes referred to as “millage tax.” A mill is one one-thousandth of a dollar, and in property tax terms is equal to $1.00 of tax for each $1,000 of assessment. 29 mills, therefore, is equal to $29 for every $1,000 of assessed value, or 2.9%. The tax liability can also be calculated by multiplying the taxable value of the property by the mill rate and then dividing by 1,000.

The chart on page 19 of this report (PDF), compiled by the government of the Distinct of Columbia, shows property tax rates in the DC and each state’s largest city. It provides a good illustration of the way property tax rates are calculated, although it makes no mention of mills, as this term is not used in every state. This chart (PDF) shows property tax rates for Connecticut localities, expressed in mill rates. (note that the two charts are not for the same year, so the rates for Bridgeport, Connecticut do not match).

This is the correct way to calculate the tax liability on the property in the quiz question:

1. Find the nominal property tax rate. (If you don’t know your rate, contact your state’s revenue department, which should provide a chart of local rates, and keep in mind that most states levy property taxes at the state level as well as the local level.) If the rate is given in mills, convert it to a percentage. For example, in the Connecticut chart, the mill rate for Andover is 27.30. This equals 27.3 out of 1,000, or 2.73 out of 100—that is, 2.73%. In our quiz question, the nominal rate of 14.5 mills equals 1.45%.

2. Multiply the nominal property tax rate by the assessment ratio, which is the percentage of the value of the property that is subject to tax. In many areas, 100% of the value is taxed, so this step is unnecessary. However, some jurisdictions do not tax the entire value of the property. For example, if the $300,000 property is located in Charleston, WV, it will be taxed at 60% (see the DC government chart), which means the nominal property tax rate applies to only $180,000 of the property. The product of the nominal tax rate and the assessment ratio is called the “effective property tax rate,” which represents the actual percentage of the market value of property that is taken in taxes. In Charleston, which served as the hypothetical location for the quiz, the nominal property tax rate is 1.45%, which makes the effective tax rate 0.87% (that is, 1.45% x 60%).

3. Multiply the effective property tax rate by the value of the property. So the $300,000 property faces a .87% effective rate, which comes to a liability of $2,610.00.

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