There are certain types of taxes that you can deduct on your tax return if you itemize on Form 1040, Schedule A. To be deductible on your tax return, a tax must be charged to you and you must have paid it during your tax year. Here are the six taxes the IRS will allow you to deduct if you itemize:
1. State and local income tax. Individuals can deduct state and local (city) income taxes on their Federal tax return. These taxes usually are withheld from your wages during the tax year and appear on your Form W-2. Also, any estimated state and local tax payments during the tax year are tax-deductible. To increase your itemized deductions on your tax return, consider prepaying estimated state income taxes before the end of the year. Lastly, if you owed any tax on last year’s state and local tax, return those tax payments are deductible in the current tax year.
2. State and local sales tax. If you itemize, you have the option of claiming your state and local sales tax or state and local income tax. Retirees, pensioners, and residents of states without a state income tax often opt to deduct sales tax. Optional sales-tax tables included in the Schedule A instructions give taxpayers a sales-tax deduction amount as an alternative to saving their receipts (actual expenses) throughout the year. Taxpayers use their income level and number of exemptions to find the sales-tax amount for their state. If you purchased a vehicle, boat or airplane, you may add the sales tax you paid on that big-ticket item to the amount shown in the IRS table for your state.
3. Real-estate tax. The real-estate or property taxes you pay on your residence can be deducted on your tax return. Make sure to include any town or village tax. A person must have ownership interest in the property to deduct the payment. This amount often appears on the mortgage-interest statement you receive from your mortgage lender at the end of the year. Property taxes on a second or vacation home, and real-estate taxes on foreign-owned properties, are deductible. If you own a timeshare in which you hold a deed of trust, you may write off the portion of the maintenance fee allocated to property taxes. New homebuyers and re-financers should review the settlement pages (HUD-1 form) from their closing statement as deductible real-estate taxes are usually listed there.
4. Personal-property tax. Tax-deductible personal-property taxes are only those based on the value of personal property, such as a boat or car. Another term for personal-property tax is an “ad valorem tax” (“according to value”). The tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year. For example:
Your state charges a yearly motor-vehicle registration tax of 1 percent of value plus 50 cents per hundredweight. You paid $32 based on the value ($1,500) and weight (3,400 lbs.) of your car. You can deduct $15 (1 percent X $1,500) as a personal-property tax because it is based on the value. The remaining $17 ($.50 X 34), based on the weight, is not deductible.
5. Foreign tax. This tax is generally imposed on income and investments on foreign securities. One can deduct this tax on Schedule A or as a tax credit on Form 1040.
6. State benefit tax. As an employee, you can deduct mandatory contributions to state benefit funds that provide protection against loss of wages. Several states, including NYS and NJ, impose this deductible tax on employees.
Some taxes and fees you cannot deduct on Schedule A include Federal income taxes, Social Security taxes, homeowner’s association fees, estate and inheritances taxes, and service for water, sewer or trash collection. Refer to Publication 17 for more taxes you cannot deduct.
Barry Lisak is an IRS Enrolled Agent, meaning that he has passed special U.S. Treasury Department exams that qualify him to represent clients dealing with audits or tax-resolution cases. Any questions can be directed to him at (516) TAX-SAVE, or email@example.com.