Yesterday we began our discussion on itemized deductions by talking about mortgage interest. Today our attention turns to the types of taxes that are deductible.
If you itemize your deductions you can deduct certain taxes. Among the taxes that are deductible are state income tax, city and local taxes, sales tax, property tax, and personal property tax. Interestingly enough, these taxes are commonly overlooked by taxpayers and not deducted. These deductions can save you a lot of money.
We start our discussion with state and local income tax. I am lucky that I am in a state that doesn’t have an income tax, but for those of you that do have state and local taxes, the amount is deductible. To be deductible the tax must be imposed on you and must have been paid during the tax year that you deduct it. Typically, state and local income tax is withheld from your paycheck and appears on your W-2 form at the end of the year. The following are also deductible:
· Any estimated taxes that you paid to state or local governments during the tax year, and
· Any prior year’s state or local income tax you paid during the year.
In lieu of state and local taxes, or instead of in the case of someone in a state that does not impose a tax, you can deduct sales tax. In other words, you must choose between sales tax and state and local taxes. Typically, the deduction for sales tax works better for those that are in a state that does not impose a state income tax, because the sales tax is usually lower.
There are two methods for deducting sales tax:
· Method 1: Actual Sales Tax Expense – You would keep all of your receipts for the year and add up the sales tax that you spent. As I am sure you can imagine, this method requires an incredible amount of record keeping on your part; however it could result in a larger deduction
· Method 2: Optional Sales Tax Tables – Use the amount provided by the IRS on the sales tax table. In addition the amount, you can deduct the amount of sales tax on:
o The purchase or lease of a vehicle,
o The purchase of a boat or aircraft, or
o The purchase or substantial addition or renovation of a home.
There is a special rule that exists for those taxpayers that file as married filing separately. If both spouses itemize, then both spouses must take either the state income tax deduction or the sales tax deduction. The tax law does not allow the couple to mix and match.
Property taxes that you pay are tax deductible. If your mortgage company escrows your property taxes, the amount that you paid will be on the Form 1098 that they send you at year’s end. If you purchased your home in the current tax year, make sure that you deduct the amount of prepaid taxes that you paid. This amount will be listed on the closing statement (HUD-1) of your home.
Not all charges that appear as property taxes from government agencies are tax deductible. The following is a list of items that are not deductible:
· Amounts paid for local benefits that can increase the value of your home.
· A flat charge from your local government for a single service.
· Charges for a residential service.
· A unit fee for the delivery service.
If you live in a state that charges a fee based on the value of your personal property, then that amount is deductible as personal property tax. Examples of personal property tax are the yearly fee for the registration of your car, if you pay a portion of that fee in ad valorem tax.
As you can see there are tax deductions for taxes paid. Sounds redundant, but it is the law.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle, and The Complete Guide to Retirement Plans for Small Businesses available on Nook and Kindle