There are five types of deductible nonbusiness taxes:
- State, local and foreign income taxes
- State, local and foreign real estate taxes
- State, and local personal property taxes
- State and local sales taxes, and
- Qualified motor vehicle taxes
To be deductible, the tax must be imposed on you and must have been paid during your tax year. However, tables are available to determine your state and local general sales tax amount. Refer to Form 1040 Instructions for more information. Taxes may be claimed only as an itemized deduction on Form 1040, Schedule A.
State and local income taxes withheld from your wages during the year appear on your Form W-2 (PDF). 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. As an employee, you can deduct mandatory contributions to state benefit funds that provide protection against loss of wages.
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. Many states and counties also 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.. Local benefits taxes are deductible if they are for maintenance or repair, or interest charges related to those benefits.
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.
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.
Taxes and fees you cannot deduct on Schedule A 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. You may be subject to a limit on some of your itemized deductions including nonbusiness taxes. Please refer to the Form 1040 Instructions for the limitations based on the adjusted gross income.
Generally, sales taxes are not deductible on Schedule A. However, for Tax Years 2005, 2006, 2007, 2008, and 2009 if you file a Form 1040 and itemize deductions on Schedule A, you have the option of claiming either state and local income taxes or state and local sales taxes (you can’t claim both). If you saved your receipts throughout the year, you can add up the total amount of sales taxes you actually paid and claim that amount. If you didn’t save all your receipts, you can choose to claim a standard amount for state and local sales taxes.
Also, you may be able to deduct state and local sales or excise taxes you paid after February 16, 2009, for the purchase of any new motor vehicle(s). You may deduct these taxes on Form 1040, either as an addition to your standard deduction, or on Schedule A, if you elect to itemize your deductions. However, if you make an election to deduct state and local general sales taxes instead of state and local income taxes on Schedule A, you can only deduct any state and local taxes you paid on the purchase of a new motor vehicle as part of your total state and local general sales tax deduction. Please refer to the Form 1040 Instructions for limitations based on vehicle price, vehicle types, and income qualifications.Note: The deduction for state and local sales taxes expired effective 12/31/2009 unless extended.