State and Local General Sales Taxes

You can elect to deduct state and local general sales taxes instead of taking a deduction for state and local income taxes.  (You cannot deduct both.)  This sales tax deduction is especially beneficial to taxpayers who live in states without a state income tax law.  In states where there is a state income tax, you should calculate your itemized deduction for taxes both ways, to see which gives you the greater deduction.  If  you choose to deduct sales taxes, you can deduct your actual sales tax expenses or use the Optional State Sales Tax Tables.

Actual Sales Taxes Paid

You can deduct the actual state and local general sales taxes you paid, including compensating use taxes, plus selective sales taxes.  You cannot take an itemized deduction for sales tax paid on items used in your trade or business.  (You may be able to deduct sales tax on business items as a business expense, or the sales tax may have to be capitalized as part of the cost of an asset.)

Selective sales tax on food, clothing, medical supplies, or motor vehicles can be deducted even if the rate is less than the general sales tax rate.  But if the selective sales tax rate on motor vehicles is higher than the general rate, you can deduct the tax only up to the amount of the general sales tax rate.  Motor vehicles for this purpose include cars, trucks, vans,  motorcycles, recreational and off-road vehicles, sport utility vehicles, and motor homes.  If you lease a vehicle, you can also deduct the applicable sales tax.

Optional State Sales Tax Tables

The Optional State Sales Tax Tables are available in Internal Revenue Service (IRS) Publication 600.  In order to use the tables, you will need to know the number of exemptions you are claiming on your tax return, and your available income.  This is defined as your adjusted gross income, plus any nontaxable items, such as:

• Tax-exempt interest
• Veteran’s benefits
• Nontaxable combat pay
• Workers’ compensation
• Nontaxable part of social security or railroad retirement benefits
• Nontaxable part of IRA, pension, or annuity distribution

So in effect, you are able to deduct sales tax on a higher income amount (your available income) than that on which you are paying federal income tax. 

Sales Tax that can be Added to the Amount in the Table

In addition to your corresponding state sales tax amount from the tables, you may also be able to deduct local general sales taxes, if applicable in your locality, and state and local general sales tax on the following specified items:

• Motor vehicles, including a leased vehicle, up to the amount that would have been imposed at the general sales tax rate, if the actual tax rate on motor vehicles is higher.
• An aircraft, boat, home (including mobile and prefabricated), and building materials, provided the tax was at the general sales tax rate.

There is a worksheet in IRS Publication 600 that guides you through the calculation.

If you lived in more than one state during the tax year, you will need to prorate your deduction based on the number of days you lived in each state.  If you are a resident of Alaska, you will have to use actual sales taxes paid as your deductible amount.

If you are married filing separately, both spouses elect to deduct state and local sales taxes (instead of state and local income taxes), and one spouse decides to use the Optional State Sales Tax Tables, the other spouse must also use the tables.

State and Local Income Taxes

State and local income taxes are deductible, but taxes on income that is exempt from U.S. federal income tax are not deductible.

If you choose to deduct state and local income taxes, rather than sales taxes, you can include:

• State and local income taxes withheld from your pay during the year.  The tax withheld from your pay is reported on your Form W-2.  If you have other types of income, you may also have state and local income tax withholding reported on Forms W-2G, 1099-G, 1099-R, and 1099-MISC
• State and local income taxes paid for a prior year, such as taxes you paid this year when you filed your state or local income tax return for last year.  If you had to pay any penalties or interest, you can deduct only the part of your payment that is for taxes.
• State and local estimated tax payments made during the current year, including any part of a prior year refund that you chose to have credited to your current year's state or local income taxes.
• In California, New Jersey, or New York, you can deduct mandatory payments to the Nonoccupational Disability Benefit Fund; in Rhode Island you can deduct payments to the Temporary Disability Benefit Fund; in Washington, payments to the State Supplemental Workmen’s Compensation Fund; and in West Virginia, payments to the Unemployment Compensation Fund.

Refunds or Credits

You should not reduce your deduction by any state or local income tax refund or credit you expect to receive.  And if you receive a refund of, or credit for, prior year state and local income taxes, you should not reduce your current year deduction.  Instead of reducing your deduction, you may have to report the refund or credit as a recovery on Form 1040, on the line for “Taxable refunds, credits, or offsets of state and local income taxes”, if you deducted the tax in the prior year.  If you did not itemize deductions in the prior year, you do not have to report the refund in your income.

Foreign Income Taxes

If you paid income taxes to a foreign country or U.S. possession, you can generally take either a deduction or a credit, but not if the tax was imposed on income that is exempt from U.S. tax under the foreign earned income or foreign housing exclusion.  This exclusion is taken by filing Form 2555, Foreign Earned Income, or 2555EZ, Foreign Earned Income Exclusion.

If the foreign income tax is not on income that is excluded, you can take either an itemized deduction for the tax, or the Foreign Tax Credit on Form 1116. 

Real Estate Taxes

You can deduct real estate taxes (state, local or foreign) you paid on real estate you own that was not used for business, but only if the taxes are based on the assessed value of the property.

You cannot include the following amounts in your deduction for real estate taxes:

• Itemized charges for services to specific property or persons, for example, a monthly charge per house for trash collection, or a fixed charge for a certain volume of water consumed.
• Local assessments for improvements that tend to increase the value of your property (for example, sidewalks or roads).  The cost of a property improvement is added to the basis of the property.  But a charge is deductible if it is only to repair or maintain an existing public facility in service.

Taxes Included in Mortgage Payment or Settlement Statement

If your mortgage payments include your real estate taxes, you can only deduct the amount that was actually paid to the taxing authority during the year.  Real estate taxes could also be shown on your settlement statement if you bought or sold your home or other property during the year.  If taxes are placed in escrow, only the real estate tax that the third party actually paid to the taxing authority is deductible.

Refunds and Rebates 

If you received a refund or rebate in the current year of real estate taxes you paid during the current year, you should reduce your deduction by the amount of the refund or rebate.  If you received a refund or rebate in the current year of real estate taxes you paid in an earlier year, and which you deducted that year, rather than reducing your current year deduction, you must include the refund or rebate on the line for “Other income” on Form 1040.

Personal Property Taxes 

State or local personal property taxes are deductible only if the tax is based on value alone and is charged on a yearly basis.  A tax that is called a registration fee and is charged for exercising a privilege, such as registering motor vehicles and using them on the highway, would qualify as a deductible personal property tax, for the amount that is based on the value of the property.  Any other part of the tax or registration fee, that is based on the weight of the vehicle, for example, would not be deductible.

Taxes You May Not Deduct

The following taxes are not allowed as an itemized deduction.

• Federal income tax
• Estate, inheritance, legacy, or succession taxes are generally not deductible unless you, as the beneficiary, must include the corresponding income in your gross income when you file your personal income tax return.  In that case, you can deduct the estate tax as a miscellaneous deduction not subject to the 2% of adjusted gross income limit.
• Gift tax
• Social security, Medicare, Federal unemployment (FUTA), and railroad retirement (RRTA) taxes
• Customs duties
• Gasoline and other excise taxes
• Car inspection fees
• License fees (driver’s license, marriage license)
• Fines or penalties
• Per capita taxes
• Local assessments for sidewalks or other improvements (These would normally be added to your basis in the property.)

Expenses for Business or Income Producing Activity