Our series on itemization continues with a look at deducting tax fees and expenses.
For a non-business tax to be deductible the tax must first be imposed on you and also paid during your tax year. The following types of non-business taxes may be claimed as an itemized deduction on the Schedule A:
Non-Business Taxes That are Deductible:
- State local and foreign income taxes
- State local and foreign real estate taxes
- State and local personal property taxes
- State and local sales taxes and
- Qualified motor vehicle taxes
You are allowed to deduct the greater of the state income tax paid or the state and local sales tax paid whichever gives the greater deduction. There are tables available to determine your state and local general sales tax amount. The amount provided on the table should be compared to the state income tax paid to determine the best deduction. State and local income taxes withheld from your wages during the year appearing on your W-2 may also be deductible. The following amounts are also deductible:
- Any estimated taxes you paid to state or local governments during the year and
- Any prior year’s state or local income tax you paid during the year
Generally you can take either a deduction or a tax credit for foreign income taxes imposed on you by a foreign country or a United States possession. Please contact Lindemeyer CPA for additional information on the foreign income tax credit.
Deductible real estate taxes are generally any state local or foreign taxes on real property. They must be charged uniformly against all property in the jurisdiction and must be based on the assessed value. Many states and counties also impose local benefit taxes for improvements to property such as assessments for streets sidewalks and sewer lines. These taxes cannot be deducted. However you can increase the cost basis of your property by the amount of the assessment.
If a portion of your monthly mortgage payment goes into an escrow account and periodically the lender pays your real estate taxes out of the account to the local government do not deduct the amount paid into the escrow account. Only deduct the amount actually paid out of the escrow account during the year to the taxing authority.
Deductible personal property taxes are those based only on the value of personal property such as a boat or car. The tax must be charged to you on a yearly basis even if it is collected more or less than once a year.
Taxes and fees you cannot deduct on Schedule A include:
- federal income taxes
- social security taxes
- stamp taxes
- transfer taxes on the sale of property
- homeowner’s association fees
- estate and inheritance taxes
- service charges for water sewer or trash collection
You may be subject to a limit on some of your itemized deductions including non-business taxes. Please contact Lindemeyer CPA for the limitations based on the adjusted gross income.