Friday, November 21, 2014

Itemized Deductions for Taxes Paid

A taxpayer can elect to deduct either state and local sales taxes or state and local income taxes, but not both.

State and Local Income Taxes    

Includes the following:
    Withholding reported on 2013 Forms W-2, W-2G, 1099-G, 1099-R, and 1099-MISC.
    Taxes paid in 2013 for a prior year, such as the balance due paid when filing the 2012 state income tax return or a balance due when amending a prior year state income tax return.
    State and local estimated tax payments made during 2013, including the prior year refund credited to 2013, and prior year estimated payments made during 2013. Example: The fourth quarter 2012 estimate paid in January 2013.
    Mandatory contributions made to the California, New Jersey, or New York Nonoccupational Disability Funds, the Rhode Island Temporary Disability Benefit Fund, the New Jersey, Pennsylvania, or Alaska Unemployment Compensation Funds, or the Washington State Supplemental Workmen’s Compensation Fund.

State and Local General Sales Taxes

There are two methods to figure the sales tax deduction.
1) Actual taxes paid. The actual taxes paid (from receipts, invoices, etc.) but only for purchases where the tax rate is the same as the general sales tax rate. For selective sales taxes on food, clothing, medical supplies, and motor vehicles, the actual tax paid is deductible even if the tax rate is less than the general sales tax rate. For motor vehicles only, if the tax rate is more than the general sales tax rate, only the portion of the tax that would have been imposed at the general sales tax rate is deductible.
 Motor vehicles include cars, motorcycles, motor homes, recreational vehicles, SUVs, trucks, vans, offroad vehicles, and leased motor vehicles.
The amount from the optional state sales tax tables. An additional amount for local general sales taxes is allowed if the taxpayer’s locality imposes a general sales tax, plus taxes paid on motor vehicles (described above), aircraft, boats, homes (including mobile and prefabricated homes), or materials to build a home. For motor vehicles only, if the tax rate is more than the general sales tax rate, 1)  only the portion of the tax that would have been imposed at the general sales tax rate is deductible. For aircraft, boats, and homes, the tax is deductible only if it was imposed at the general sales tax rate.

Business Taxes

Under either method, taxes paid on items used in a trade or business are not deductible as itemized deductions.

Real Estate Taxes

Real estate taxes are deductible as itemized deductions only if the taxpayer owns the real estate and the taxes are based on the assessed value of the property. If a mortgage company pays the taxes from an escrow account, deduct the taxes actually paid on behalf of the taxpayer, not the amount the taxpayer paid into escrow. Unlike mortgage interest, the real estate tax deduction is not limited to the first two homes owned by the taxpayer.

Charges for Services

Itemized charges for trash collection, water, sewer, etc. are not deductible as real estate taxes.

Special Assessments—Principal Portion

Charges for improvements that tend to increase the value of the property are added to the basis of the property and are not deductible. Example: An assessment to build a new sidewalk. Charges to maintain existing public facilities already in service are deductible as real estate taxes. Example: An assessment to repair an existing sidewalk.

Special Assessments—Interest Portion

Deductible as real estate taxes regardless of whether the assessment is for an improvement or a repair.

Sale or Purchase of House

The real estate tax deduction must be adjusted for the time period the taxpayer actually owned the property. The seller is treated as paying the property taxes up to, but not including, the date of sale. The buyer is treated as paying the taxes beginning with the date of sale. This rule applies even if the seller or buyer actually pay different amounts at the closing.

Delinquent Taxes

If the buyer pays delinquent taxes that were imposed on the seller for an earlier year, the buyer must add the taxes paid to basis rather than deduct them. Refunds and rebates. If a refund is received in 2013 for real estate taxes paid in 2013, the deduction is reduced by the amount of the refund. If the refund is for taxes paid in an earlier year, do not reduce the deduction on Schedule A. Instead, include the refund or rebate in income on line 21, Form 1040, but only to the extent a tax benefit was received for deducting the taxes in the earlier year.

Personal Property Taxes

Personal property taxes are deductible if based on value alone and are charged on a yearly basis.
Example: Jesse paid $99 for the registration of his car in 2013. $64 of the fee was based on the car’s value, and $35 was based on its weight. His deduction is limited to $64.

Refunds and Rebates

If a refund is received in 2013 for real estate taxes paid in 2013, reduce the itemized deduction on Schedule A, Form 1040, by the amount of the refund. If the refund is for taxes paid in an earlier year, do not reduce the deduction on Schedule A. Instead, include the refund or rebate as Other Income on line 21, Form 1040, to the extent a tax benefit was received for deducting the taxes in an earlier year.

Other Taxes

Taxpayers can choose to deduct foreign taxes or take a tax credit on Form 1040.
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