Generally, state and local taxes, real estate taxes, personal property taxes and foreign taxes (real property and income taxes) are all deductible but could be limited. The Tax Cuts and Jobs Act capped the total federal deduction for state and local taxes to a total of $10,000.
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 elect to deduct state and local sales taxes instead of state and local income taxes if higher. Both are generally calculated via software 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.
- 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 2024 taxes in January of 2025, it’s a 2025 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 are for Alabama
- Assessments by homeowners’ associations for maintaining common areas and services are not deductible.
- Assessments for government services—library fees, sewer assessments, etc.
Planning Tip:
Make certain your home and vacation properties are properly classified and you are taking advantage of any special exemptions. For further information, see the following links:
Jefferson County & Alabama Property Tax Overview – Dent Moses, LLP
Special Senior Property Tax Exemption for Jefferson County – Dent Moses, LLP
Reducing Alabama Property Taxes on a Second Home – Dent Moses, LLP
Complete Itemized Dedication Series
This series is intended to cover the most common deductions. Please keep in mind that there are always exceptions; what’s more, your situation or facts may be different from someone else. We recommend that you consult with your tax advisor before taking any action.
Part 1: The Basics
Part 2: Deductions and Medical Expenses
Part 3: Deduction for Taxes
Part 4: Deducting Mortgage Interest & Investment Interest
Part 5: Contributions & Charitable Giving
Part 6: Casualty & Theft Losses
