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Itemized Deductions from A to Z, Part 3: Deductions and Taxes

For additional information regarding 2014 tax planning, you can download our 2014 Tax Planning Guide from the Resources tab on our website.

 

After medical and dental expenses, taxes are the next section on Schedule A. Generally, state and local taxes, real estate taxes, personal property taxes and foreign taxes (real property and income taxes) are all deductible. Let’s look at each line of the taxes you paid on Schedule A:

  • State and local taxes. You are allowed a deduction for state taxes withheld and paid during the year. You might also elect to deduct state and local sales taxes instead of state and local income taxes. The deduction is generally calculated with the most beneficial option selected. For individuals paying estimates, this is a planning opportunity as the last estimate (due January 15th of the following year) can be accelerated into the current year. An employee also could increase withholding to boost the deduction.
  • Real estate taxes. The individual taking the deduction must have an ownership interest in the property. There is no deduction for paying the taxes on your mom’s house if she is the owner. Taxes for non-business property are deducted on Schedule A—if you have business or rental property, the deduction goes elsewhere. The deduction is taken in the year the taxes are paid, so if you (or your mortgage company) pay 2014 taxes in January of 2015, it’s a 2015 deduction. If you buy or sell real estate during the year, the taxes are prorated. Basically, you get a deduction for the portion of the real property year (10/1-9/30) you own the property. To correctly calculate this, you will need a copy of the closing statement.
  • Personal property taxes. These are generally tag taxes, which can only be deducted as a tax if they are annually assessed based on the value of the vehicle. The deduction is for the tax portion only—issuance and other fees are not deductible.
  • Other taxes. This includes taxes paid to a foreign country or U.S. possession.

Taxes or other expenses you cannot deduct as taxes:

  • Gasoline or federal excise taxes
  • Federal payroll taxes such as social security, Medicare and federal unemployment (FUTA) are not deductible on the federal return but might be on the state.
  • Assessments by homeowners’ associations for maintaining common areas and services are not deductible.
  • Assessments for government services—library fees, sewer assessments, etc.

Planning Tip:
If you have been subject to alternative minimum tax, increasing deductions within a particular year might not be beneficial. Check with your advisor.
In our next post, we’ll tackle mortgage interest.