Deducting Taxes Paid

Case Study

06 Jan Deducting Taxes Paid

When you file your 2015 federal income tax this year, you can take a standard deduction. For 2015, it is $6,300 for single taxpayers and for married individuals filing separately; $12,600 for couples filing jointly and for certain widow(er)s; and $9,250 for those filing as heads of household. The beauty of taking the standard deduction is that it is simple – there is no need to gather information and risk triggering an audit.

However, taking time to itemize deductions can be a tax saver. If your itemized deductions exceed the standard amounts, you will generally come out ahead by listing them on Schedule A of IRS Form 1040. Indeed, the amount you can claim under ‘Taxes You Paid’ may be enough to justify itemizing.

Property tax

You can itemize the property tax you pay for your home. If you have a second home, the tax on that property also can be deducted. In fact, you can deduct any amount of tax you pay on any number of homes that were not used for business, even if they are in different states or out of the United States.

The key here is to deduct the payment for the year in which it was paid. If you had a property tax payment due in January or February 2016, for instance, and you sent in the payment in December 2015, that amount can be an itemized deduction in 2015.

If you make monthly mortgage payments on a home, a portion of each payment might go into an escrow account for eventual forwarding to the property tax collector. In this scenario, the property tax payments are deductible for the year in which the money is actually paid out of the escrow account to the taxing authority.

So-called ‘local benefits taxes’ paid by property owners may or may not be deductible, depending on how the money is used. Our office can determine whether you can deduct such taxes. You also may be able to deduct personal property tax, assessed on the value of items, such as boats or cars.

To be decided

State and local income tax you paid also can be deducted on Schedule A. That includes amounts withheld from paychecks as well as any estimated state or local estimated income tax you paid during the calendar year.

For the past decade, taxpayers have had the option of deducting state and local sales tax instead of state or local income tax, if that provides a greater deduction. This provision has expired several times, only to be renewed. Currently, the sales tax deduction opportunity is not in effect for 2015, but it is likely that Congress will have restored it by the end of the year.

A sales tax deduction obviously appeals to residents of states or localities with no income tax. If you live in an area with an income tax, and if you are itemizing deductions, you should see which choice provides the greater tax savings.

Example 1: Marge Collins pays enough property tax to make itemizing worthwhile. When assembling her records together for tax preparation, Marge discovers that she paid a total of $3,000 in state income tax in 2015. Assuming the sales tax deduction has been restored for 2015, Marge should see how much sales tax she paid last year. If the total exceeds $3,000, she probably should deduct sales tax instead of state income tax.

How can Marge determine the amount of sales tax she paid throughout 2015? One way is to go through all of her receipts for the year and calculate the sales tax she paid on purchases.

Many people do not keep all their receipts, though. If you are in that category, and if the rules for 2015 are the same as they were for 2014, you can use the optional sales tax table provided by the IRS, in the instructions to their Form 1040.

That table shows the amount of the sales tax you are estimated to have paid in the relevant year, depending on your income, where you live, and the exemptions you claim. Note that ‘income,’ for this purpose, includes not only your adjusted gross income but also inflows such as tax-exempt interest and nontaxable Social Security benefits. The greater your income, the more sales tax you are presumed to have paid.

In addition, the IRS tables do not assume you have made any large purchases. Thus, the resulting amount from the tables can be increased by any sales tax you paid for a car (bought or leased), motorcycle, boat, airplane, motor home, or similar items.

Last year, a sales tax deduction calculator was available online at irs.gov. The IRS asked for a few simple entries to illustrate the amount of state and local sales tax you could claim. Assuming the sales tax deduction is reinstated for 2015, this calculator may help you get your records ready for tax preparation.

Trusted advice: not deductible

Following is a list of taxes and other expenses that are not deductible taxes:

  • Federal income & most excise taxes
  • Social Security, Medicare, federal unemployment (FUTA), & railroad retirement (RRTA) taxes
  • Customs duties
  • Federal estate & gift taxes
  • Tax on gasoline
  • Car inspection fees
  • Assessments for sidewalks or other improvements to your property
  • License fees (marriage, driver’s, dog, etc.)
Tags:
,