Topic Number 503 - Deductible Taxes
There are four types of deductible nonbusiness taxes:
- State, local, and foreign income taxes
- State and local general sales taxes
- State, local, and foreign real estate taxes, and
- State and local personal property taxes
To be deductible, the tax must be imposed on you, and you must have paid it during your tax year. Taxes may be claimed only as an itemized deduction on Form 1040, Schedule A.pdf, Itemized Deductions.
State, Local, and Foreign Income Taxes -- State and Local General Sales Taxes
State and local income taxes withheld from your wages during the year appear on your Form W-2.pdf, Wage and Tax Statement. You can elect to deduct state and local general sales taxes instead of state and local income taxes, but you can't deduct both. If you elect to deduct state and local general sales taxes, you can use either your actual expenses or the optional sales tax tables. Refer to the Form 1040, Schedule A Instructions, for more information and for the optional sales tax tables. You may also use the Sales Tax Deduction Calculator. 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. For information regarding the foreign tax credit, refer to Topic No. 856. As an employee, you can deduct mandatory contributions to state benefit funds that provide protection against loss of wages. Refer to Publication 17, Your Federal Income Tax for Individuals, for the states that have such funds.
State, Local, and Foreign Real Estate Taxes
Deductible real estate taxes are generally any state, local, or foreign taxes on real property levied for the general public welfare. The charge must be uniform against all real property in the jurisdiction at a like rate.
There are popular loan programs that finance energy saving improvements through government-approved programs. You sign up for a home energy system loan and use the proceeds to make energy improvements to your home. In some programs, the loan is secured by a lien on your home and appears as a special assessment or special tax on your real estate property tax bill over the period of the loan. The payments on these loans may appear to be deductible real estate taxes; however, they're not deductible real estate taxes. Assessments or taxes associated with a specific improvement benefitting one home aren't deductible. However, the interest portion of your payment may be deductible as home mortgage interest. Refer to Publication 936, Home Mortgage Interest Deduction, and Can I Deduct My Mortgage-Related Expenses? to see whether you might qualify for a home mortgage interest expense deduction.
Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. You can't deduct these taxes. However, you can increase the cost basis of your property by the amount of the assessment. Refer to Publication 551, Basis of Assets, for more information. Local benefits taxes are deductible only if they're for maintenance, repair, or interest charges related to those benefits. See Taxes for local benefits in Chapter 22 of Publication 17.
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, don't 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.
State and Local Personal Property Taxes
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's collected more than once a year or less than once a year.
Some taxes and fees you can't deduct on Schedule A include federal income taxes, social security taxes, transfer taxes (or stamp taxes) on the sale of property, homeowner's association fees, estate and inheritance taxes, and service charges for water, sewer, or trash collection. Refer to the Form 1040 Instructions and Publication 17 for more taxes you can't deduct. You may be subject to a limit on some of your itemized deductions including nonbusiness taxes. In addition to these limits, there may be a phaseout (reduction of) your total itemized deductions based on your adjusted gross income. Please refer to the Form 1040 Instructions and Topic No. 501 for the limitations.
For more information on nonbusiness deductions for taxes, refer to Publication 17 and Can I Deduct Personal Taxes That I Pay as an Itemized Deduction on Schedule A?