Tax Tips and Tidbits
February 11, 2017
By Steven R. Anderson E.A.
This week we are talking about the deductions for taxes paid. There are four types of taxes that are deductible as itemized deductions. State and Local Income Taxes OR sales taxes, real estate taxes, personal property taxes, and foreign income taxes..
State and Local Taxes
A taxpayer can elect to deduct either state and local sales taxes or state and local income taxes, but not both.
State and Local Income Taxes
Includes the following:
- Withholding reported on 2017 Forms W-2, W-2G, 1099-G, 1099-R, and 1099-MISC.
- Taxes paid in 2016 for a prior year, such as the balance due paid when filing the 2015 state income tax return or a balance due when amending a prior year state income tax return.
- State and local estimated tax payments made during 2016, including the prior year refund credited to 2016, and prior year estimated payments made during 2016. Example: The fourth quarter 2015 estimate paid in January 2016.
- Mandatory contributions made to the California, New Jersey, or New York Non-Occupational Disability Funds, the New Jersey, Pennsylvania, or Alaska Unemployment Compensation Funds, or the Washington State Supplemental Workmen’s Compensation Fund.
State and Local General Sales Taxes
There are two methods to figure the deduction:
1) Actual taxes paid. The actual taxes paid (from receipts, invoices, etc.) but only for purchases where the tax rate is the same as the general sales tax rate.
2) The amount from the optional state sales tax tables. An additional amount for local general sales taxes is allowed if the taxpayer’s locality imposes a general sales tax, plus taxes paid on motor vehicles, aircraft, boats, homes (including mobile and prefabricated homes), or materials to build a home. In New York, the state sales tax rate is 4%. In Dutchess County, the local sales tax rate is 4.125%.
Real Estate Taxes
Real estate taxes are deductible as itemized deductions, but only if the taxpayer owns the real estate and the taxes are based on the assessed value of the property.
If a mortgage company pays the taxes from an escrow account, deduct the taxes actually paid on behalf of the taxpayer, not the amount the taxpayer paid into escrow.
Unlike mortgage interest, the real estate tax deduction is not limited to the first two homes.
Remember, the taxes need to be imposed on, and paid by the taxpayer. If both these conditions are not met, the taxes won’t be deductible. (Example: John pays the real estate taxes on his home and on his parents’ home. John is not on the deed of his parents’ home. John can deduct the taxes he paid on his own home because they are imposed on John and paid by John. He cannot deduct the taxes he paid for his parents. Even though the taxes were paid by him, they were not imposed on him. John’s parents cannot deduct the taxes either, because they did not pay them. Note: if you had given his parents the money and then they paid the taxes, they would have been able to deduct them.)
Personal Property Taxes
Personal property taxes are deductible if based on value alone and are charged on a yearly basis.
Example: Jesse paid $99 for the registration of his car in 2017. $64 of the fee was based on the car’s value, and $35 was based on its weight. His deduction is limited to $64.
New York does not have a personal property tax, but Connecticut does.
Foreign Income Taxes
This is a fairly complex topic. Foreign income taxes can be taken as a deduction, but there is also a credit available, which may be better.
Remember, all taxes are deductible in the year paid, not the year they were for. (Example, in May of 2016, Jim paid his back real estate taxes for 2014, 2015 and 2016. This payment is deductible on Jim’s 2016 tax return. He gets no deduction on his 2014 or 2015 return because the taxes were paid in 2016.)
Steven Anderson is an Enrolled Agent, licensed to practice before the IRS. He is the owner of the Beacon and Pawling franchises of H&R Block where he holds a Master Tax Advisor certification and has 27+ years of experience. Steve is also a graduate of the National Tax Practice Institute and a member of the American Society of Tax Problem Solvers, with specialization in collection cases.