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.