5 Details to Know About the Refundable Income Tax Credit Before the End of the Year

(For information purposes only. Seek guidance from a tax professional or the Department of Revenue for specific questions on the tax credit.)

Nebraska Farm Bureau has learned some tax preparers are encouraging property owners to pay 2021 property taxes before the end of year to take advantage of the refundable income tax credit for property taxes paid to schools, set at 25.3 percent for tax year 2021. The preparers argue the credit rate could go down next year and property owners should maximize their credit by paying 2021 property taxes before the end of the year. Nebraska Farm Bureau created this Question & Answer Document to assist you in your tax planning for this year and subsequent years. These are some good questions to discuss with your tax preparers.

What is the refundable income tax credit for property taxes paid to schools?

LB 1107, passed in 2020, provided that taxpayers who pay property taxes to schools and file Nebraska income taxes are eligible to claim a refundable income tax credit on the amount of property taxes paid to schools. The credit applies to property taxes paid on real property (land, buildings, residences) excluding taxes levied for bond repayments and taxes levied as a result of voter-approved overrides of levy limits. It does not apply to taxes paid to schools on personal property like agricultural machinery and equipment or those paid on motor vehicles.

What is the credit rate under the program?

The credit rate varies each tax year depending upon state revenues and the amount of property taxes levied by schools. For tax year 2020, the credit equaled 6 percent of property taxes paid to schools and applied to taxes paid in 2020. Governor Ricketts has announced the credit rate will equal 25.3 percent for tax year 2021.

Why did the refundable tax credit rate increase from 6 percent to 25.3 percent?

When the Legislature created the refundable income tax credit, it appropriated $125 million toward the program. However, LB 1107 also provided for increases in the available funding for the credit when state tax revenues exceeded specific revenue thresholds. State tax receipts exceeded these thresholds in fiscal year 2020-21, triggering an increase in funding for the credit from $125 million to $548 million and the increase in the credit rate.

What is the credit rate expected to be for tax year 2022?

The credit rate for tax year 2022 will not be known until next fall because it is contingent upon available funding and school property taxes levied, neither of which will be known until next fall.  However, we do know the available credit funding for tax year 2022 will not be less than $548 million, although it could increase if state receipts trigger an increase. The Legislature allowed for increases in available funding for the credit, but not decreases until tax year 2025 when the law says available funding will be set at a maximum of $375 million. Thus, at worst, if available funding remains at $548 million, the credit rate would be slightly less than 25.3 percent for tax year 2022, contingent upon the growth in property taxes levied by schools.

Are there other factors one should consider when deciding whether to pay 2021 property taxes before the end of the year?

Yes. Based on when you decide to pay your property taxes and claim your refundable income tax credit, there may be implications for income taxes in future years. Contact your tax preparer to understand the potential implications.