How to Deduct Real Estate and Other Taxes
Here’s a detailed overview of how taxes are deductible on an individual’s tax return.
State and Local Taxes (SALT)
Income Taxes or Sales Taxes
- Option to Deduct: Taxpayers have the choice to deduct either state and local income taxes paid or state and local sales taxes paid during the year, but not both.
- Who Benefits: This choice benefits taxpayers in states with no income tax or those who made significant purchases during the year.
Property Taxes
- Deductible Taxes: Property taxes on real estate you own that are based on the assessed value of the property and charged on a uniform basis can be deducted.
- Non-Deductible Fees: Many local benefits taxes or assessments for improvements that increase the value of your property (e.g., sidewalks, sewer lines) are not deductible.
Personal Property Taxes
- Criteria for Deduction: Taxes on personal property, such as vehicles, can be deducted if they are assessed annually and based on the property’s value.
Limitations
- SALT Deduction Cap: The total amount you can deduct for state and local taxes (including income or sales taxes and property taxes) is capped at $10,000 ($5,000 if married filing separately).
- Alternative Minimum Tax (AMT): Deductions for taxes, among other items, may trigger the AMT for some taxpayers, limiting the tax benefit.
Deductibility on Different Tax Schedules
- Schedule A (Itemized Deductions): Most tax deductions, including state and local taxes, are claimed here. Taxpayers must decide whether itemizing or taking the standard deduction offers the best tax benefit.
- Schedule C and E: Business owners and landlords can deduct state and local taxes directly related to their business or rental properties on these schedules, outside the limitations of Schedule A.
Example:
Olivia is a single taxpayer living in a state with both income and sales taxes. She owns a home, a car, and works as a freelance graphic designer. During the tax year, Olivia faces the following financial situation relevant to her tax deductions:
- State Income Taxes Paid: $4,800
- General Sales Taxes Paid: Estimated at $2,500
- Additional Sales Tax from Major Purchases: $1,200
- Property Taxes Paid on Home: $3,600
- Vehicle Registration Fee Based on Value: $400
Olivia is trying to determine the best way to maximize her deductions related to taxes paid.
Analysis and Strategy
- SALT Deduction Cap: The first limitation Olivia encounters is the $10,000 cap on SALT deductions. This cap includes state and local income or sales taxes plus property taxes.
- Choosing Between Income and Sales Taxes:
- With the additional $1,200 in sales taxes from major purchases, her total sales tax deduction would be $3,700.
- Olivia decides to deduct income taxes instead of sales taxes because they are greater, even with the additional sales tax from major purchases.
- Total Deductible Taxes:
- State Income Taxes: $4,800
- Property Taxes: $3,600
- The total is $8,400, which is under the $10,000 SALT deduction cap.
- Vehicle Registration Fee: Since the fee is based on the vehicle’s value and assessed annually, it qualifies as a personal property tax. This adds $400 to her deductible taxes, for a total of $8,800.
