Itemized deductions – taxes

Your Guide to State, Local, Federal, Estate + International Taxation

itemized deductions, taxes, IRSYesterday I discussed charitable contributions as itemized deductions and today I am discussing taxes as they relate to itemized deductions. So here we go…

State, local, foreign income and sales taxes

You have the option of deducting general sales tax or state and local income taxes, but not both. Also you may think providing sales tax information is pointless, because you paid more in income taxes. This is not always the case; you can check the IRS website for a sales tax calculation on general sales tax here. It calculates your general sales tax and then adds in specified items such as cars, boats, etc. to come up with your total sales tax deduction. Even if you don’t benefit on your Federal return, you may benefit on your State return, so always let your accountant know when you make a big ticket purchase.

Foreign income taxes may also be deducted, but this is generally not the case since you can take a foreign tax credit instead. We all know credits are better than deductions.

Tax planning tip. You have the option of paying your 4th quarter estimated state income tax payment prior to year-end, allowing you to take the deduction in the current year or take it in the following year, but you have to take it in the year paid. However, if you are in Alternative Minimum Tax (AMT), you may wish to defer paying it until the following January, as state income tax payments are NOT deductible in determining AMT. Keep this in mind for next year.

Personal and property taxes

Personal property taxes are deductible as long as they meet three criteria. Do you know those three criteria? I’d be surprised if you did. They are:

  1. The tax must be ad valorem. This means the tax is computed based on the value of the property or a portion of the property. If it is based solely on another criterion, I’m sorry, it is not deductible. If it is partially based on both then it is partly deductible.
  2. The tax must be imposed on an annual basis.
  3. The tax must be imposed in respect of personal property.

Property taxes are generally deductible if paid by the person who was assessed the tax. You don’t get to deduct property taxes paid on the behalf of another. Only property taxes on personal residences and property held for investment are itemized deductions on Schedule A, but property taxes, depending on the situation, can be on Schedules C, E or F of form 1040 as well.

And that is enough on taxes for now and itemized deductions. Did you learn anything different? If not, that’s good! You must be doing it right! If you learned something new and want more detail, please consult your tax advisor with your questions or concerns.

Chris Morrison CPA