Table of Contents
Limit on itemized deductions. The amount of adjusted gross income allowed without limiting your itemized deductions has increased. For 2008, if your adjusted gross income is more than $159,950 ($79,975 if you are married filing separately), you may have to reduce the amount of certain itemized deductions, including most miscellaneous deductions. For more information and a worksheet, see the instructions for Schedule A (Form 1040), line 29.
Deduction for general sales taxes extended. The deduction for state and local general sales taxes that you can elect to take as an itemized deduction on Schedule A (Form 1040) instead of state and local income taxes was extended through 2009.
This chapter discusses which taxes you can deduct if you itemize deductions on Schedule A (Form 1040). It also explains which taxes you can deduct on other schedules or forms and which taxes you cannot deduct.
This chapter covers the following topics.
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Income taxes (federal, state, local, and foreign).
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General sales taxes (state and local).
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Real estate taxes (state, local, and foreign).
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Personal property taxes (state and local).
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Taxes and fees you cannot deduct.
Use Table 22-1 as a guide to determine which taxes you can deduct.
The end of the chapter contains a section that explains which forms you use to deduct different types of taxes.
Publication
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514 Foreign Tax Credit for Individuals
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530 Tax Information for First-Time Homeowners
Form (and Instructions)
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Schedule A (Form 1040) Itemized Deductions
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Schedule E (Form 1040) Supplemental Income and Loss
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1116 Foreign Tax Credit
The following two tests must be met for you to deduct any tax.
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The tax must be imposed on you.
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You must pay the tax during your tax year.
This section discusses the deductibility of state and local income taxes (including employee contributions to state benefit funds), and foreign income taxes.
You can deduct state and local income taxes. However, you can elect to deduct state and local general sales taxes instead of state and local income taxes. But you cannot deduct both taxes in the same year.
Your deduction may be for withheld taxes, estimated tax payments, or other tax payments as follows.
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Any state or local income tax refund (or credit) you expect to receive for 2008.
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Any refund of (or credit for) prior-year state and local income taxes you actually received in 2008.
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Alaska Unemployment Compensation Fund.
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California Nonoccupational Disability Benefit Fund.
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New Jersey Nonoccupational Disability Benefit Fund.
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New Jersey Unemployment Compensation Fund.
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New York Nonoccupational Disability Benefit Fund.
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Pennsylvania Unemployment Compensation Fund.
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Rhode Island Temporary Disability Benefit Fund.
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Washington State Supplemental Workmen's Compensation Fund.
Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U.S. possession. However, you cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U.S. tax under the foreign earned income exclusion or the foreign housing exclusion. For information on these exclusions, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. For information on the foreign tax credit, see Publication 514.
You can elect to deduct state and local general sales taxes, instead of state and local income taxes, as an itemized deduction on Schedule A (Form 1040), line 5b. Generally, you can use either your actual expenses or the state and local sales tax tables to figure your sales tax deduction.
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Tax-exempt interest.
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Veterans' benefits.
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Nontaxable combat pay.
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Workers' compensation.
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Nontaxable part of social security and railroad retirement benefits.
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Nontaxable part of IRA, pension, or annuity distributions, excluding rollovers.
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Public assistance payments.
Deductible real estate taxes are any state, local, or foreign taxes on real property levied for the general public welfare. You can deduct these taxes only if they are based on the assessed value of the real property and charged uniformly against all property under the jurisdiction of the taxing authority.
Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. They also do not include itemized charges for services (such as trash collection) assessed against specific property or certain people, even if the charge is paid to the taxing authority. For more information about taxes and charges that are not deductible, see Real Estate-Related Items You Cannot Deduct , later.
Worksheet 22-1.Figuring Your Real Estate Tax Deduction
1. | Enter the total real estate taxes for the real property tax year | |
2. | Enter the number of days in the real property tax year that you owned the property | |
3. | Divide line 2 by 365 (for leap years, divide line 2 by 366) | . |
4. | Multiply line 1 by line 3. This is your deduction. Enter it on Schedule A (Form 1040), line 6 | |
Note. Repeat steps 1 through 4 for each property you bought or sold during the real property tax year. Your total deduction is the sum of the line 4 amounts for all of the properties. |
Example 1.
Dennis and Beth White's real property tax year for both their old home and their new home is the calendar year, with payment due August 1. The tax on their old home, sold on May 7, was $620. The tax on their new home, bought on May 3, was $732. Dennis and Beth are considered to have paid a proportionate share of the real estate taxes on the old home even though they did not actually pay them to the taxing authority. On the other hand, they can claim only a proportionate share of the taxes they paid on their new property even though they paid the entire amount.
Dennis and Beth owned their old home during the real property tax year for 127 days (January 1 to May 6, the day before the sale). They figure their deduction for taxes on their old home as follows.
Worksheet 22-1.Figuring Your Real Estate Tax Deduction — Taxes on Old Home
1. | Enter the total real estate taxes for the real property tax year | $620 |
2. | Enter the number of days in the real property tax year that you owned the property | 127 |
3. | Divide line 2 by 365 (for leap years, divide line 2 by 366) | .347 |
4. | Multiply line 1 by line 3. This is your deduction. Enter it on Schedule A (Form 1040), line 6 | $215 |
Since the buyers of their old home paid all of the taxes, Dennis and Beth also include the $215 in the selling price of the old home. (The buyers add the $215 to their cost of the home.)
Dennis and Beth owned their new home during the real property tax year for 243 days (May 3 to December 31, including their date of purchase). They figure their deduction for taxes on their new home as follows.
Worksheet 22-1.Figuring Your Real Estate Tax Deduction — Taxes on New Home
1. | Enter the total real estate taxes for the real property tax year | $732 |
2. | Enter the number of days in the real property tax year that you owned the property | 243 |
3. | Divide line 2 by 365 (for leap years, divide line 2 by 366) | .664 |
4. | Multiply line 1 by line 3. This is your deduction. Enter it on Schedule A (Form 1040), line 6 | $486 |
Since Dennis and Beth paid all of the taxes on the new home, they add $246 ($732 paid less $486 deduction) to their cost of the new home. (The sellers add this $246 to their selling price and deduct the $246 as a real estate tax.)
Dennis and Beth's real estate tax deduction for their old and new homes is the sum of $215 and $486, or $701. They will enter this amount on Schedule A (Form 1040), line 6.
Example 2.
George and Helen Brown bought a new home on May 3, 2008. Their real property tax year for the new home is the calendar year. Real estate taxes for 2007 were assessed in their state on January 1, 2008. The taxes became due on May 31, 2008, and October 31, 2008.
The Browns agreed to pay all taxes due after the date of purchase. Real estate taxes for 2007 were $680. They paid $340 on May 31, 2008, and $340 on October 31, 2008. These taxes were for the 2007 real property tax year. The Browns cannot deduct them since they did not own the property until 2008. Instead, they must add $680 to the cost of their new home.
In January 2009, the Browns receive their 2008 property tax statement for $752, which they will pay in 2009. The Browns owned their new home during the 2008 real property tax year for 243 days (May 3 to December 31). They will figure their 2009 deduction for taxes as follows.
Worksheet 22-1.Figuring Your Real Estate Tax Deduction — Taxes on New Home
1. | Enter the total real estate taxes for the real property tax year | $752 |
2. | Enter the number of days in the real property tax year that you owned the property | 243 |
3. | Divide line 2 by 365 (for leap years, divide line 2 by 366) | .664 |
4. | Multiply line 1 by line 3. This is your deduction. Claim it on Schedule A (Form 1040), line 6 | $499 |
The remaining $253 ($752 paid less $499 deduction) of taxes paid in 2009, along with the $680 paid in 2008, is added to the cost of their new home.
Because the taxes up to the date of sale are considered paid by the seller on the date of sale, the seller is entitled to a 2008 tax deduction of $933. This is the sum of the $680 for 2007 and the $253 for the 123 days the seller owned the home in 2008. The seller must also include the $933 in the selling price when he or she figures the gain or loss on the sale. The seller should contact the Browns in January 2009 to find out how much real estate tax is due for 2008.
Table 22-1. Which Taxes Can You Deduct?
Type of Tax | You Can Deduct | You Cannot Deduct |
Fees and Charges | Fees and charges that are expenses of your trade or business or of producing income. | Fees and charges that are not expenses of your trade or business or of producing income, such as fees for driver's licenses, car inspections, parking, or charges for water bills (see Taxes and Fees You Cannot Deduct ). |
Fines and penalties. | ||
General Sales Taxes | State and local general sales taxes, including compensating use taxes. | State and local income taxes if you choose to deduct state and local general sales taxes. |
Income Taxes | State and local income taxes. Foreign income taxes. Employee contributions to state funds listed under Contributions to state benefit funds. |
Federal income taxes. Employee contributions to private or voluntary disability plans. State and local general sales taxes if you choose to deduct state and local income taxes. |
Other Taxes | Taxes that are expenses of your trade or business. Taxes on property producing rent or royalty income. |
Federal excise taxes, such as tax on gasoline, that are not expenses of your trade or business or of producing income. |
Occupational taxes. See chapter 28. One-half of self-employment tax paid. |
Per capita taxes. | |
Personal Property Taxes | State and local personal property taxes. | Customs duties that are not expenses of your trade or business or of producing income. |
Real Estate Taxes | State and local real estate taxes. Foreign real estate taxes. Tenant's share of real estate taxes paid by cooperative housing corporation. |
Real estate taxes that are treated as imposed on someone else (see
Division of real estate taxes between buyers and sellers).
Taxes for local benefits (with exceptions). See Real Estate-Related Items You Cannot Deduct. |
Trash and garbage pickup fees (with exceptions). See Real Estate-Related Items You Cannot Deduct. | ||
Rent increase due to higher real estate taxes. | ||
Homeowners' association charges. |
Payments for the following items generally are not deductible as real estate taxes.
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Taxes for local benefits.
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Itemized charges for services (such as trash and garbage pickup fees).
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Transfer taxes (or stamp taxes).
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Rent increases due to higher real estate taxes.
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Homeowners' association charges.
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A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use),
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A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged to each homeowner for trash collection), or
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A flat fee charged for a single service provided by your government (such as a $30 charge for mowing your lawn because it was allowed to grow higher than permitted under your local ordinance).
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The fees or charges are imposed at a like rate against all property in the taxing jurisdiction,
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The funds collected are not earmarked; instead, they are commingled with general revenue funds, and
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Funds used to maintain or improve services are not limited to or determined by the amount of these fees or charges collected.
Personal property tax is deductible if it is a state or local tax that is:
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Charged on personal property,
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Based only on the value of the personal property, and
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Charged on a yearly basis, even if it is collected more or less than once a year.
A tax that meets the above requirements can be considered charged on personal property even if it is for the exercise of a privilege. For example, a yearly tax based on value qualifies as a personal property tax even if it is called a registration fee and is for the privilege of registering motor vehicles or using them on the highways.
If the tax is partly based on value and partly based on other criteria, it may qualify in part.
Example.
Your state charges a yearly motor vehicle registration tax of 1% of value plus 50 cents per hundredweight. You paid $32 based on the value ($1,500) and weight (3,400 lbs.) of your car. You can deduct $15 (1% × $1,500) as a personal property tax because it is based on the value. The remaining $17 ($.50 × 34), based on the weight, is not deductible.
Many federal, state, and local government taxes are not deductible because they do not fall within the categories discussed earlier. Other taxes and fees, such as federal income taxes, are not deductible because the tax law specifically prohibits a deduction for them. See Table 22-1.
Taxes and fees that are generally not deductible include the following items.
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Employment taxes. This includes social security, Medicare, and railroad retirement taxes withheld from your pay. However, one-half of self-employment tax you pay is deductible. In addition, the social security and other employment taxes you pay on the wages of a household worker may be included in medical expenses that you can deduct or child care expenses that allow you to claim the child and dependent care credit. For more information, see chapters 21 and 32.
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Estate, inheritance, legacy, or succession taxes. However, you can deduct the estate tax attributable to income in respect of a decedent if you, as a beneficiary, must include that income in your gross income. In that case, deduct the estate tax as a miscellaneous deduction that is not subject to the 2%-of-adjusted-gross-
income limit. For more information, see Publication 559. -
Federal income taxes. This includes income taxes withheld from your pay.
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Fines and penalties. You cannot deduct fines and penalties paid to a government for violation of any law, including related amounts forfeited as collateral deposits.
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Gift taxes.
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License fees. You cannot deduct license fees for personal purposes (such as marriage, driver's, and dog license fees).
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Per capita taxes. You cannot deduct state or local per capita taxes.
Many taxes and fees other than those listed above are also nondeductible, unless they are ordinary and necessary expenses of a business or income producing activity. For other nondeductible items, see Real Estate-Related Items You Cannot Deduct , earlier.
You deduct taxes on the following schedules.
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