Can I deduct back taxes paid?

September 09, 2019 by Carolyn Richardson, EA, MBA
Money, United States Treasury Check, 1040 Tax Form

While you may have planned and planned for your taxes, increasing your withholding and tracking every deduction, sometimes it seems like you just can’t win for trying. You wind up owing money to either the IRS or your state government when April 15th rolls around and you prepare your return. Hopefully, you have the money available to pay the balance due immediately when you file, but if not, there are always installment payment options that allow you to pay off the balance over the coming months or even years.

Generally, individual taxpayers who itemize their deductions can deduct state or local taxes in the year they are paid. So, if you are paying off a prior year state or local tax obligation to your state, you can include these payments as a state tax deduction, subject to the $10,000 cap on state and local taxes which is applicable until 2025. These deductible payments can be either state or local income taxes or state or local property taxes. If the state or local government seizes your tax refund directly from another tax year, you can also deduct the amount of the refund as a payment of back taxes, so it’s important to retain any notices you received from them to document the amount paid. Keep in mind that the refund amount must also be reported as a tax refund when preparing your return, even if you did not receive the money.

Any applicable penalties or interest accrued and paid on these belated state tax payments are not deductible, however, so while you may know what your total payment is, this likely includes interest at the very least. Verifying what portion of the amount is actually taxes versus penalties or interest is important to filing a correct return.

If you owe money to the IRS and are paying it off in installments or a lump sum in later years, these taxes are not deductible on your tax return, because federal taxes are never deductible.

Please note that the above applies to your Federal taxes only. States can, and do, vary with their handling of state and federal taxes, both current and past due, which may change the tax picture in your state.

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Carolyn Richardson, EA, MBA
Learning Content Managing Editor

 

Carolyn has been in the tax field since 1984, when she went to work at the IRS as a Revenue Agent. Carolyn taught many classes at the IRS on both tax law changes and new hire training. In 1990, she left the IRS for a position at CCH, where she was a developer on both the service bureau software and on the Prosystevm fx tax preparation software for nearly 17 years. After leaving CCH she worked at several Los Angeles-based CPA firms before starting at TaxAudit as an Audit Representative in 2009. Carolyn became the manager of the Education and Research Department in 2011, developing course materials for the company and overseeing the research requests. Currently, she is the Learning Content Managing Editor. 


 

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This blog does not provide legal, financial, accounting, or tax advice. The content on this blog is “as is” and carries no warranties. TaxAudit does not warrant or guarantee the accuracy, reliability, and completeness of the content of this blog. Content may become out of date as tax laws change. TaxAudit may, but has no obligation to monitor or respond to comments.