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3 Conditions for Deducting Personal Property Taxes

Mar 6th 2017
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As the April 18 federal income tax deadline inches closer, here are some filing-time reminders you can give to your clients:

Q: Under what circumstances am I allowed to deduct personal property taxes?

A: Only if you forego the standard deduction and itemize on Schedule A of Form 1040. In that case, a personal property tax may be deducted, provided it meets the following three conditions:

  1. The tax must be based on the value of the personal property.
  2. The tax must be imposed on an annual basis.
  3. The tax must be imposed on personal property.

Q: My sister and I formed a partnership. The partnership’s main asset is a building that leased space to an architect last year. Subsequently, the architect decided to make substantial improvements to her office. Does our partnership have to declare the value of these improvements as part of its rental income?

A: No, as long as the improvements aren’t a substitute for regular rental payments. But IRS regulations prohibit landlords from claiming any depreciation deductions for improvements that are paid for by tenants.

Q: I keep my savings at a bank that credited interest of $900 to my account in December 2016. But it wasn’t until last month that I took the passbook to the bank, which then entered the interest. Am I supposed to show the interest on my 1040 form for 2016 or 2017?

A: Report the $900 on your return for 2016. The entire $900 was included in the Form 1099 for 2016 that you received from the bank.

Q: Two weeks ago, I finally decided to play our state lottery, which turned out to be a savvy move, as I won $75,000. As of now, I expect to be in a much lower tax bracket next year. Suppose I wait until the start of next year to cash my ticket. That strategy would significantly cut the IRS’s share. Will the IRS go along with my maneuver?

A: Absolutely not. Because the money’s yours for the asking, you must report all of it on a return for this year. It makes no difference you hold off until next year to collect your prize.

Q: My employer has given me an expenses-paid vacation to New York City next January as an award for reaching my sales goals. How will this affect my income taxes?

A: You’re liable for taxes on rewards and bonuses, including vacation trips paid to you for outstanding work. If such an award is payable at some future time at the option of your employer, it isn’t taxable until you receive it or your employer makes it available to you.

Q: Is it possible to take an itemized deduction on Schedule A for water and sewer taxes, just the same as for real estate taxes?

A: No. Generally, water and sewer taxes are nondeductible personal expenses.

Q: Does the law permit me to deduct Social Security taxes withheld from my wages?

A: These taxes are never deductible.

Q: Am I allowed to include the cost of lottery tickets with my itemized deductions for state and local taxes or charitable contributions?

A: No. IRS rules for gambling losses apply to lottery tickets. The cost of those tickets can be taken as an itemized deduction to offset any kind of gambling winnings – lotteries, horse racing, cards, etc. But if there are no winnings, there’s no deduction.

Q: I signed for lessons with a Chicago dance studio and paid in advance. Then I moved to California. What about a deduction for the unused lessons?

A: The IRS forbids any kind of write-off for personal expenses of this type.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 160 and counting).

Stay competitive with your fellow accountants who turn to the articles when, say, they correspond with clients or they want to show clients how to nimbly sidestep pitfalls while capitalizing on opportunities to diminish, delay, or deep-six payments of sizable amounts that would otherwise swell IRS coffers.

Also be mindful of the articles when you strive to build name recognition, a goal attainable only by choosing and implementing strategies that set you apart from ferocious competition. Use the articles to prepare talks to audiences, such as business owners, investors, and retirees.

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