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Published: 2008-03-26

Senior Citizen Home Owners Can Save Taxes Now and After Death



You can reduce your property taxes

Will you turn 65 years old or older this year? Reducing your property taxes is one good way to assist estate planning and retirement goals. And we can help. You may think "there's nothing certain except death and taxes." There are, however, several ways for seniors citizens to reduce their property taxes. Property taxes are calculated by multiplying the assessed value of the property by the tax rate. With the recent passage of a new bill by Illinois lawmakers, senior citizens may now have the following three ways to reduce the assessed value of their home and lower their tax bills: (1) the general homestead exemption, (2) the Senior Citizens' Homestead Exemption, and (3) the Senior Citizens Tax Freeze Homestead Exemption.

General Homestead Exemption

In Illinois, a qualified homeowner of any age is entitled to a homestead exemption. When this exemption applies, the assessed value of the home is decreased by the amount of the exemption. The amount of the exemption is equal to the increase in the assessed value of the property since 1977, with a maximum exemption of $3,500. In Cook County, the maximum exemption is $4,500.

Senior Citizens Homestead Exemption

Homeowners who are 65 years old or older are entitled to an additional exemption, the Senior Citizen Homestead Exemption. Senior citizen homeowners may further decrease their assessed value by $2,000 ($2,500 in Cook County).

Senior Citizens Tax Freeze Homestead Exemption

Senior citizens may be entitled to yet a third type of property tax relief, the Senior Citizens Tax Freeze Homestead Exemption. Recently passed by the Illinois General Assembly, the exemption affects the assessed value but works a bit differently than the other exemptions.

Who is eligible?

To be eligible for the Senior Citizens Tax Freeze Homestead Exemption, you must meet the following requirements:
*be at least 65 years old or turn 65 during the taxable year;
*have a total household income for the prior year of $35,000 or less;
*have used the property as your principal residence on January 1 of the taxable year;
*own the property (house, condominium, cooperative apartment) or have a lease on a single-family residence; and
*be liable for the property taxes on the home.

There are, however, instances when the exemption will continue even though one of the requirements is not strictly met. If the homeowner dies leaving a spouse who continues to live in the house, the exemption will continue unchanged. The exemption may also still apply if the homeowner goes to a nursing home, as long as the home is unoccupied or occupied by the person's spouse. However, a married couple is entitled to only one exemption between them. For instance, a couple may not claim an exemption for their primary residence and their vacation home.

How does it work?

The Senior Citizen Tax Freeze Homestead Exemption allows a qualified senior citizen to freeze the assessed value of homestead property. An exemption allows your property tax bill to be calculated using the assessed value of the property from a prior year. For example, suppose you receive the Senior Citizens Tax Freeze Homestead Exemption when your home's assessed value was $50,000. From that point on, as long as you continue to qualify for the exemption, your property tax will be calculated using the assessed value of $50,000, even if the property sky-rockets in value. However, you must make a new application for the exemption each year, showing you still meet the qualifications. Although the assessed value of your property is then frozen, there are two ways that your property taxes could increase. First, the county may raise the tax rate that is applied to your assessed value. However, the increased rate will still be applied only to the frozen assessed value. Second, your assessed value may increase if you make improvements to your property. Assume, for instance, that you make home improvements and those improvements are assessed at $10,000. Your new total assessed value is now $50,000 plus $10,000 in home improvements. Your assessed value is then frozen again and will remain at $60,000 as long as you qualify for the exemption. Will you be receiving the property tax breaks you are entitled to this year? For more information about these and other estate-planning issues, contact our office; we can help.

Qualified Personal Residence Trusts: Another useful Estate Planning Tool

Since people can't take their money with them when they die, most would rather see it go to their heirs than to the IRS. Many older Americans are finding that their total net worth is surpassing the federal estate/gift tax exemption of $675,000. Once this exemption is surpassed, a stiff tax of up to 55% must be paid upon death on the remaining value of the estate. Thus, the increasing price of homes and high estate taxes are prompting people to search for ways to decrease their total net worth. The IRS has created a tool to do just that, a Qualified Personal Residence Trust or a QPRT. QPRTs aren't for everyone, but they are becoming increasingly popular given their offer of extensive tax savings. The QPRT enables homeowners to transfer their home to their children via a Grantor Retained Income Trust (commonly referred to as a GRIT). The homeowners reserve their right to live there for a term they specify in the trust agreement. The advantage to this is that the IRS treats this trust as if the homeowners have given their children a gift that they will not receive until a specified time in the future. The IRS will determine the value of the home based on the net present value of this future gift. For example, assume a home is worth $1 million and the owner decides to retain possession of it for ten years. The present value of this future gift would be a mere $341,200. Thus, the million dollar home uses only $341,200 of the $675,000 estate tax exemption. Additionally, this amount doesn't vary as the value of the home changes during the ten-year term. If the value increases to $2 million, only $341,200 is put toward the exemption because the value of the home at the time it was given to the children (put in the trust) was $1 million. During the specified term, the owner has virtually all the prerogatives of ownership. The home may be sold and replaced, repaired, improved, etc. But if the home is sold the owner will lose the one-time capital gains exclusion for residences. Mortgaging the property held in a trust may also become more difficult. So what's the catch? First, QPRT's are restricted to residences and vacation homes. Second, the grantor must outlive the term of the trust. Setting the term becomes sort of a guessing game. As the term increases, the tax decreases because the sooner someone receives a gift, the higher its value. If, for example, we reduce the term in our hypothetical to five years, the value of the gift would increase to $585,932. Thus, the homeowners will want to make the term as long as possible without surpassing their actual life span. If the term expires and the homeowners want to continue to live in the house, they can simply rent it from their children. But beware- if family problems arise, the children could charge unusually high rent, take possession, or even sell the house right out from under their parents. What happens if a grantor doesn't outlive the trust? The value of the residence may revert back to the estate and most of the tax benefits of the QPRT may be lost. However, the owner may receive an estate tax credit for gift tax paid on the creation of the trust. Each client's situation must be considered individually to determine if this tool will be helpful. We will take the time necessary to evaluate your estate planning needs, including your tax considerations. Estate planning can be complex and calls for competent advice, we can help.