Which Taxes Are Deductible?

Taxpayers can deduct certain taxes if they itemize their deductions. To be deductible, the tax must have been imposed on the taxpayer and paid by the taxpayer during the current tax year. Taxes that are deductible include:

• State and local taxes. Taxpayers can choose one of the following taxes but not both:
  • Income taxes — this includes withheld taxes, estimated tax payments, or other tax payments such as a prior year refund of a state or local income tax that taxpayers applied to their estimated state or local income taxes.
  • Sales taxes (from the optional sales tax tables or actual) — taxpayers may be able to add the state and local general sales taxes paid on certain specified items to the tax table amounts.
• Real estate taxes
  • State, local, or foreign real estate taxes that are based on the assessed value of the taxpayer's real property, such as the taxpayer's house or land, are deductible.
  • Real estate taxes are generally reported on Form 1098, Mortgage Interest Statement, or a similar statement from the mortgage holder. If the taxes are not paid through the mortgage company, taxpayers should have a record of what was paid during the year.
  • Some real estate taxes are not deductible, including taxes for local benefits and improvements that tend to increase the value of the property, itemized charges for services, transfer taxes, rent increases due to higher real estate taxes, and homeowners association fees.

Taxpayers may not realize real estate taxes paid on Form 1098, Mortgage Interest Statement, may include nondeductible amounts. Use the interview techniques with taxpayers to determine if nondeductible amounts such as sanitation pickup and water fees are included in their Form 1098. These items should not be included on Schedule A.