There are two tests that you must pass in order to deduct any tax. The tax must:
1. Be imposed on you. In other words, you must have the legal liability for the tax.
2. The tax must be paid by you during the tax year. You can only deduct the tax in the year paid, not the year in which it is assessed. It is considered paid the day you mail or deliver the check provided the check is honored by the financial institution. If you use an electronic means of payment, the date of payment is the date recorded by the financial institution as the date it was paid.
State and Local Income Taxes
You can deduct state and local income taxes. You can deduct the amount withheld from your pay in the year in which they are withheld. A refund would be taxable income in the year the refund is received if you itemized your deductions in the prior year. Estimated tax payments are deductible in the year paid. A prior year refund applied to your taxes for the following year is deductible in the year it is credited to your taxes.
If you file a separate return, you and your spouse can only deduct those taxes that apply to your own income.
Foreign Income Taxes
Normally, you may take a deduction or a credit for foreign income taxes paid. You may choose which approach gives you the greatest tax advantage.
General Sales Taxes
You may choose to deduct general sales taxes instead of taking the deduction for state and local income taxes. The amount of this deduction is the actual expenses or an amount from the table provided by the IRS. In addition to the table amount, you may also deduct sales taxes paid on the purchase of a motor vehicle. Sales taxes on a boat, aircraft, home, or major addition to your home may be included if the rate is the same as the general sales tax rate.
Real Estate Taxes
You may deduct state and local property taxes that you pay on homes you own. In addition you may deduct foreign real estate taxes paid. A tenant in a cooperative housing corporation may deduct his/her share of the real estate taxes.
You cannot deduct taxes for local benefits. For example, if the city installs a sidewalk in front of your property and levies a special assessment, this is not deductible, as you are receiving a special benefit and the improvement will likely increase the value of your property. You may increase the basis in your property by the amount of the assessment.
You cannot deduct:
Personal Property Taxes
- Fees for trash and garbage pick up, even if included in your tax bill.
- Rent increases due to higher real estate taxes.
- Homeowners association fees or charges.
You may deduct state and local personal property taxes paid. In order to be a deductible personal property tax it must meet three criteria:
1. It must be charged on personal property (automobiles, boats, household furnishings, etc.)
2. The amount of the tax must be based on the value of the property.
3. Charged on a yearly basis, even if collected more or less than once a year.
Taxes on property producing rent or royalty income are deductible, usually on Schedule E
. Occupational taxes and taxes that are expenses of your trade or business are deductible, either as a Miscellaneous Itemized Deduction
or on Schedule C
Taxes and Fees that are Not Deductible
Generally speaking, if a tax is not listed as deductible, it cannot be taken as a deduction. Some of the more common examples of these are:
- Estate, inheritance, legacy, or succession taxes.
- Federal income taxes
- Fines or penalties for violation of the law
- Gift taxes
- License fees, such as hunting, fishing, or marriage licenses
- Per capita taxes, those levied as a flat amount per person
- Social security and Medicare taxes
- Social security and other employment taxes paid for household workers may qualify as medical or child care expenses.