Schedule A: Taxes You Can Deduct

It seems that there are just so may taxes that we have to pay from federal, state, sales, gift taxes, etc. The good thing about this is that the IRS allows us to deduct a few of these items on our tax return. However, not all taxes are deductible.

You can deduct any of the allowable taxes if you meet these tests:

1. The tax must be imposed on you – for example, you can deduct property taxes only if you are the owner of the property.
2. You must pay the tax during your tax year – if someone else pays the taxes on your behalf, you cannot take the deduction.

Example: You live in a house owned by your parent. You wanted to help them out so you paid the real estate property tax for them. Since you did not own the house and your parents did not pay the taxes, neither you nor your parents can deduct the real estate property tax on your return.

Taxes You May Deduct

State and Local Income taxes - You may deduct the taxes withheld from your paycheck, estimated taxes you made during the year, or any part of a refund of prior-year state or local income taxes that you chose to have credited to your 2010 estimated state or local income taxes. For example, for whatever reason, you ended up paying additional state or local tax for tax year 2009 in 2010, this would be deductible in 2010 because the rule is “WHEN” or the date that you paid the tax not to what year it’s applicable to! You cannot take this deduction if you are claiming the state and local general sales tax- see next item.

State and Local General Sales Tax – This benefit was applicable in 2009 but Congress extended it in 2010. (See  2010 Tax Update). In 2010, you may be able to take the state or local general state taxes in lieu of the state or local income tax but you cannot take both deduction at the same time. The rule is you can use the deduction that generates more benefit. This normally benefits taxpayers who live in a state where state income taxes are not imposed. There are two ways to determine how much you can deduct: the standard deduction (which is based on your salary and personal and dependency exemptions, and state)  using the sales tax table and the actual expenses.

Foreign Income Taxes – generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a US possession. However, you cannot take a deduction or credit for foreign income taxes paid on income that is exempt from US tax under the foreign earned income exclusion.

Real Estate Taxes – deductible real estate taxes are any state, local, or foreign taxes on real property levied for the general public welfare. You can deduct these taxes only if they are based on the assessed value of the real property and charged uniformly against all property under the jurisdiction of the taxing authority.

Personal Property Taxes – you may be able to deduct personal property taxes that are charged on personal property, based only on the value of the personal property and charged on a yearly basis even if it collected more or less than once a year.

Non-Deductible Taxes and Fees

Federal Income Taxes – includes income taxes withheld from your paycheck

Employment Taxes – includes social security, Medicare, and railroad retirement taxes withheld from your paycheck. However, one-half of your self-employment tax is deductible. Moreover, the social security and other employment taxes you pay on the wage of a household worker may be included in medical expenses that you can deduct or child care expenses that allow you to claim the child and dependent care credit.

Fines and Penalties – you cannot deduct fines and penalties paid to a government for violation of any law, including related amounts forfeited as collateral deposits.

Others: Gift Taxes, estate taxes, inheritance taxes, legacy or succession taxes.

Source: IRS Publication 17