Taxes are a necessary evil. But most taxpayers get hit twice – once by Uncle Sam for federal income taxes and then again with various state and local taxes. At least itemizers can write off their state and local taxes on their federal return. The deduction is claimed on lines 5-9 on Schedule A of Form 1040.
There are four main types of state and local taxes that are deductible:
Real estate taxes
Personal property taxes
1. Income taxes. This category is pretty straightforward. You can deduct the state and local income taxes you’re required to pay during the year. Typically, these amounts are withheld from your paycheck and reported on the W-2 you receive from your employer. Alternatively, you might pay state and local income taxes in quarterly installments or make quarterly payments to supplement W-2 withholding.
The deduction also includes amounts paid in the current year for the prior tax year.
In lieu of deducting state and local income taxes, you can choose to write off sales taxes, but you can’t have it both ways.
2. Sales taxes. The alternative sales tax deduction, which had expired and been extended several times, was permanently preserved by the Protecting Americans from Tax Hikes Act of 2015. As a result, a taxpayer can elect to deduct either the actual sales tax paid during the year, as supported by records, or an amount from the state-by-state table in the Form 1040 instructions. The table amount, which is based on family size and income, is generally lower than your actual expense amount, but more convenient.
Icing on the cake: If you use the table amount, you can tack on the sales tax paid on certain “big-ticket items,” like cars and boats.
3. Real estate taxes. This can be another big-ticket item for taxpayers who live in affluent areas where property taxes are high. Generally, you can deduct the full amount of real estate taxes you paid during the year. However, if you claim a home-office deduction, you don’t deduct the portion of your real estate taxes attributable to the home office on Schedule A.
Some states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. Although you can’t deduct these taxes, you may increase your basis in your property by the amount of the assessment.
4. Personal property taxes. Deductible personal property taxes include those based solely on the value of property, such as a boat or car. The tax must be charged to you on an annual basis, even if it’s collected more or less than once a year.
The deduction for state and local taxes is often one of the biggest for itemizers. However, the Schedule A deduction for taxes does not include the following:
Federal income taxes
Social Security taxes
Transfer taxes (or stamp taxes) on sales of property
Homeowner’s association fees
Estate and inheritance taxes
Service charges for water, sewer, or trash collection
Finally, remember that most itemized deductions are reduced for certain upper-income taxpayers.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...