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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What Medical Expenses are Deductible?

Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. Medical expenses include the costs of equipment, supplies, and diagnostic devices needed for these purposes. The expenses must be primarily to alleviate or prevent a physical or mental defect or illness.

Limit on Itemized Deductions

For 2013, itemized deductions for medical expenses are limited to the amount above 10% of the taxpayer’s adjusted gross income (7.5% for taxpayers age 65 or over). Amounts below the percentage limit are not deductible. For 2012 and earlier years, the limit was 7.5% of AGI for all taxpayers.

When Medical Expenses Are Deductible

Medical expenses are deductible in the year actually paid, regardless of when the services in the past were provided. Expenses paid by check are considered paid on the date mailed or delivered.

Expenses paid by phone or online are considered paid on the date the financial institution statement shows as the payment date.

Credit Card

Expenses paid by credit card are considered paid on the date charged to the credit card, not the date the balance on the credit card is paid.

Future Services

Payments for care to be provided substantially beyond the end of the year are not deductible as medical expenses, except for lifetime care advance payments and payments for long-term care insurance.

Whose Medical Expenses Are Deductible

Deductible expenses include those incurred by the taxpayer, spouse, or dependent.

Spouse

The taxpayer must have been married to the spouse either at the time the spouse received the medical services or at the time the taxpayer paid the medical expenses.

Dependent

Medical expenses paid for a dependent are deductible if the person was a dependent either at the time the services were provided or at the time the expenses were paid. For medical expense purposes, a dependent is any person for whom an exemption deduction is allowed, plus anyone who cannot be claimed as a dependent because of one of the following.

•    The person who paid the medical expenses was a dependent of another taxpayer,

•    The person for whom the medical expenses were paid filed a joint return,

•    The person for whom medical expenses were paid had gross income of $3,900 or more during the year, or • The dependency exemption for a child of divorced or separated parents was assigned to the non-paying parent.

Exception for an Adopted Child

Generally, a dependent must be a U.S. citizen or national or a resident of the U.S., Canada, or Mexico. An adopted child that lived with the taxpayer all year passes this test if the taxpayer is a U.S. citizen or U.S. national.

Decedent’s Medical Expenses

Medical expenses paid before death by a decedent are included on the decedent’s final return. This includes expenses for the decedent’s spouse and dependents. A surviving spouse or personal representative of a decedent can choose to treat medical expenses paid by the estate for the medical care of the decedent as paid by the decedent at the time the medical services were provided if the expenses are paid within one year of the day after the date of death.

Medical expenses for a deceased spouse or deceased dependent are deducted on the taxpayer’s return in the year paid, whether they are paid before or after the decedent’s death. The expenses are deductible if the decedent was the taxpayer’s spouse or dependent either at the time the medical services were provided or at the time the expenses were paid.

Long-Term Care

Amounts paid for qualified long-term care expenses are deductible as medical expenses. Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services that are required by an individual who is chronically ill, and are provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Medicines

The cost of prescribed medicines is deductible. Nonprescription medicines, such as nicotine gum and patches, are not deductible.

•  Over-the-counter drugs. The cost of drugs purchased without a prescription, such as antacid, allergy medicine, and pain relievers, is not deductible as a medical expense. The cost of dietary supplements, such as vitamins, that are merely beneficial to the general health of the employee is not reimbursable on a pretax basis.

•    Insulin exception. The cost of insulin is deductible whether or not it is prescribed by a doctor.

•    Imported drugs. Imported prescription drugs can be deducted only if legally imported. The cost of prescribed drugs purchased and consumed in another country are deductible only if the drug is legal in both the other country and the United States.

Nursing Home

The cost of living in a nursing home, including meals and lodging, is deductible if a principal reason for being there is to get medical care. If the taxpayer is in a nursing home for personal reasons, only the part of the cost that is for medical or nursing care is deductible.

Reimbursed Medical Expenses

Medical expenses that are reimbursed by insurance, Medicare, Archer MSAs, health savings accounts (HSAs), or other sources are not deductible. Reduce total medical expenses paid by total reimbursements received during the year. Reimbursements for medical expenses are generally not included in income, and the expense that is reimbursed is not deducted from income. However, any medical expenses that exceed the reimbursements are deductible, and any reimbursements that exceed medical expenses are taxable to the extent the reimbursement was provided to the taxpayer on a pre-tax basis.

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