Taxpayers who are eligible to itemize deductions on Schedule A of IRS Form 1040 may deduct payments made for state, local and foreign income taxes and real property taxes, as well as state and local personal property taxes. State sales taxes can be deducted in lieu of state income taxes in some cases. Self-employed taxpayers may be able to deduct some taxes as business expenses on Schedule C rather than on Schedule A.
Choose Between State and Local Income Taxes or General Sales Taxes
According to Section 16.3 of J.K. Lasser’s Your Income Tax 2010, taxpayers can elect to deduct either state and local income taxes OR state and local general sales taxes. They cannot deduct both. This choice should be indicated on Line 5 of Schedule A.
For taxpayers in states with a state income tax, the portion of the sales tax that can be deducted for sales or excise taxes on a new motor vehicle is dependent on the income of the taxpayer and other factors. In states with a state income tax, taxpayers who choose General Sales Taxes rather than State Income Taxes on Line 5 of Schedule A can deduct the full amount of the sales tax that was paid.
In the nine states without a state income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming), taxpayers who itemize automatically deduct General Sales Tax which will include the full amount paid. This is an especially good deal for taxpayers in those states, according to Stephen Ohlemacher of the Associated Press.
In order to qualify for this deduction, the vehicle must be a car, light truck or motorcycle and have been purchased between February 17, 2009 and December 31, 2009. It must also have a gross vehicle weight of up to 8,500 pounds and be brand new. A motor home of any weight will qualify, but used vehicles of any sort will not.
Deducting Real Estate Taxes
Line 6 of Schedule A provides a deduction for taxpayers who have an ownership interest in the real property for which they paid taxes. Banks and mortgage companies generally hold tax monies in escrow and pay them during a calendar year on behalf of their customers. They also typically furnish a year-end statement that reflects the date of the tax payment. Real estate taxes are deductible for the year payments were made only if the mortgage holder actually pays them by the end of the year. Assessments by a homeowner’s association are not deductible as taxes.
When real property is sold during a tax year, the seller and the buyer each pay taxes on the property for a portion of the “real property year” as defined in the settlement statement. The allocation of taxes between the buyer and seller is generally indicated on the settlement statement and both will receive a Form 1099-S. A taxpayer who is liable for real estate taxes may deduct his share either in the year of the sale or a later year when the tax is actually paid.
Nondeductible Taxes
The following taxes are NOT deductible:
- Sales taxes on personal property, such as furniture, books, or computer equipment
- Gasoline taxes
- Taxes on alcoholic beverages
- Cigarette tax
- Estate taxes (with some exceptions)
- Income taxes (including alternative minimum tax)
- Inheritances taxes
- Regulatory License Fees (pet licenses, parking meter fees, hunting and fishing licenses)
- Social Security taxes
- Transfer taxes on real estate transactions and security transfers
To increase their deduction for these kinds of taxes, some taxpayers make a year-end prepayment of estimated tax liability. Taxes paid in conjunction with operating a business are deducted on Schedule C rather than Schedule A and must not be reported on both. For more detailed information regarding state and local taxes, visit the Internal Revenue Service website at www.irs.gov.
Marie Brannon - Experienced writer Marie Brannon hails from Texas. She is a detail-oriented writer who approaches article research with meticulous care.
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