Deductible Taxes

There are four types of deductible non–business taxes:

• State, local and foreign income taxes;
• Real estate taxes;
• Personal property taxes; and
• State and local general sales taxes.  (If you elect not to deduct state and local income taxes.)

To be deductible the must have been paid during your tax year.

INCOME TAXES

• State and local income taxes withheld from your wages during the year appear on your Form W-2. The following amounts are also deductible:
• Estimated taxes you paid to state or local governments during the year. 
• Prior year's state or local income tax you paid during the year.
• Foreign Income taxes. 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. 
• As an employee, you can deduct mandatory contributions to state benefit funds that provide protection against loss of wages. Refer to Publication 17 for the states that have such funds.

SALES TAXES

For tax years 2004 and 2005 taxpayers have the option to claim state and local sales taxes instead of state and local income taxes when they itemize deductions.

This deduction will mainly benefit taxpayers with a state or local sales tax but no income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) but it may also give a larger deduction to any taxpayer who paid more in sales taxes than income taxes.

The deduction is determined from IRS tables based on income level, number of exemptions and sales tax rate for the state.

Taxpayers also may add to the table amount any sales taxes paid on:

• Motor vehicle, (only up to the amount of tax paid at the general sales tax rate)
• Aircraft,
• Boat,
• Home (including mobile or prefabricated), or home building materials, (If the tax rate is the same as the general sales tax rate.)

REAL ESTATE TAXES

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.

Local benefits taxes.  Many states and counties 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. Refer to Publication 551, Basis of Assets, for more information. Local benefits taxes are deductible if they are for maintenance or repair, or interest charges related to those benefits.

Escrow Accounts.  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.

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 is collected more than once a year or less than once a year.  License fees are not deductible.

NON-DEDUCTIBLE TAXES

Taxes and fees you cannot deduct include:

• Federal income taxes,
• Social security taxes,
• Stamp taxes, or transfer taxes on the sale of property,
• Homeowner's association fees,
• Estate and inheritance taxes and
• Service charges for water, sewer, or trash collection.
• Generally, sales taxes are not deductible unless you elect to deduct them instead of your state and local income taxes.

For more information, refer to:

• Form 1040 Instructions, or
• Publication 17.