I’m pleased to say that the answer to this question is yes – there are quite a few different personal and business taxes you may be able to deduct. But, as always, it depends on your particular situation. Businesses can deduct taxes that they paid as part of their operations, such as real estate taxes on their office building, and licenses and regulatory fees that they paid to a state or local government. However, in this article, we are going to focus on individual taxpayers and the four general types of taxes that they may be able to deduct on their 2021 Form 1040 tax return.
These are:
- State and local income taxes,
- State and local general sales taxes,
- State and local real estate taxes, and
- State and local personal property taxes.
For these taxes to be deductible, they must have been imposed on you and you must have paid them during your tax year. The above taxes are claimed as itemized deductions on Schedule A of your Federal Form 1040, which we’ll get to shortly. But before going any further, let’s talk about each of the taxes that we listed above.
Income Taxes versus Sales Taxes
Deductions for the first two categories of taxes are mutually exclusive. That is, you must choose to deduct on your federal income tax return either:
- the state and local income taxes you paid,
OR
- the state and local general sales taxes you paid.
You cannot claim both, so obviously it would make sense for you to review both deductions and then decide which of the two to claim.
State and Local Income Taxes
Included under this heading are:
- State and local taxes withheld and reported on 2021 Forms W-2, W-2G, 1099-G, 1099-R, 1099-NEC, and 1099-MISC;
- State and local taxes you paid in 2021 for a prior year, such as the balance due you paid when you filed your 2020 state income tax return or when you amended a prior year state income tax return;
- State and local estimated tax payments you made during 2021, including any amounts paid for a prior year; and
- Any mandatory contributions you made as an employee to state benefit funds in Alaska, California, New Jersey, New York, Pennsylvania, Rhode Island, or Washington that provide protection against loss of wages.
State and Local General Sales Taxes
Under this heading, you can claim either the actual amount of state and local sales taxes you paid for the year, or the amount determined from the IRS sales tax tables which provide an estimated amount based on your location, income, and size of household. Most taxpayers do not keep receipts for all of their purchases, so the most practical solution is to use the amount from the state and local sales tax tables and add to it any other local general sales taxes imposed in your location. The sales tax you paid during the year on any large purchases, such as motor vehicles, boats, or homes, can also be added to this amount.
State and Local Real Estate Taxes
These expenses are deductible if you own the real estate being taxed and the taxes are based on the assessed value of the property. If you pay your real estate taxes through an escrow account, the deductible amount is the total real estate taxes you paid during the year – not the total amount you paid into the escrow account. Generally, mortgage companies provide a breakdown of the expenses paid through the escrow account during the year.
State and Local Personal Property Taxes
To be deductible, taxes of this type must be based on the value of personal property, such as a boat or a car, and the tax must be charged on a yearly basis.
Annual Limitation
Now that we have reviewed the types of tax expenses that may be deductible on your federal return, the time has come for a bit of less happy news. The total amount that you can deduct is limited. For tax years 2018 through 2025, the itemized deduction for state and local income taxes (or general sales taxes) paid, real estate taxes, and personal property taxes, is limited to $10,000. The deduction for any remaining amount is lost and, worse still, the deduction is limited to $5,000 if your filing status is married filing separately.
Claiming the Deduction
As we said earlier, the deductions for the taxes we have discussed are entered on Schedule A,
Itemized Deductions. You would use this form if the total that you spent on the above taxes (up to $10,000), mortgage interest on your primary residence and one other property, charitable contributions, and all medical expenses that were greater than 7.5% of your adjusted gross income (AGI), exceeds the following amounts for your filing status in 2021:
- Married Filing Jointly or Qualifying Widow(er): $25,100
- Head of Household: $18,800
- Single or Married Filing Separate: $12,550
The above threshold amounts are increased for taxpayers who are blind, or age 65 or above.
But now let’s look at an example. Let’s say you are filing jointly with your spouse for 2021 and you find that your itemized deductions add up to $24,000. In this case, you will receive a greater deduction if you choose not to use Schedule A. Choosing instead to claim the standard deduction of $25,100 would provide you with a higher deduction amount. But we would still advise that you continue to keep your receipts each year so that when you are preparing your future tax returns, you can determine if you qualify to use Schedule A and thus claim a deduction for the taxes you paid.