Property Tax
The scoop: a taxpayer who itemizes can deduct a property tax imposed on personal property only if the tax is assessed annually and based solely on the value of the property.
Example 1: Samuel Johnson paid $400 to register his car in 2008; $350 of the fee is based on the value of the car and $50 on the weight of the car. Johnson’s deduction for the personal property tax he paid in 2008 is limited to $350, the amount of the registration fee that is assessed in proportion to the value of the car.
A taxpayer can also list on Schedule C–Profit or Loss from Business of Form 1040 a deduction for a tax imposed by a state or local government on personal property she uses in a trade or business. In addition, a taxpayer can deduct registration fees charged by a state or local government for the right to use property in its jurisdiction. However, the amount an individual pays in federal income taxes or federal self-employment taxes is not deductible as a business expense.
Example 2: Sarah MacDonald, a sole proprietor, drove in 2008 a total of 10,000 miles of which 8,000 were driven for business purposes. The breakdown of total miles driven into 8,000 business and 2,000 personal miles is important because only the proportion of expenses allocable to business use, in this case 4:1 or 80%, is deductible on Schedule C. MacDonald paid $150 in state license and registration fees, $50 for a city registration sticker, and $200 in city and state personal property taxes on her car for a total outlay of $400. She decides to claim actual car expenses thus making 80% of the $400 total paid in fees and personal property taxes, or $320, deductible as a business expense.
For those readers interested in the history of property taxes in the United States, click on property taxes. And if you are a reader with foreign person status, then you are subject to income tax withholding for any disposal (sale or exchange, liquidation, transfer, redemption, etc.) of a U.S. real property interest; click on real property tax for a full discussion.
Additional relevant articles on the topic of property tax are listed below:
Many happy returns, Roger
Real Estate Tax
In a nutshell, a taxpayer with title to a property is allowed an itemized deduction for the amount of local, state, or foreign real estate tax he pays if (1) the tax is based on the property’s assessed value and (2) the property against which this tax is levied is not used in a trade or business or held for the production of income. However, no deduction is allowed for a real estate tax if it is in substance a local benefit tax, that is to say, a tax for a local benefit or improvement that tends to increase the value of a taxpayer’s property. More generally, the Internal Revenue Service, in its effort to determine the true nature of a tax on real estate, may disregard the actual or “advertised” form of the tax in question and look instead to the substance of the transaction. Only if the tax is a uniform assessment on real property throughout the relevant political subdivision–in short, a levy made for the general public welfare–will it be deductible as an itemized deduction on Schedule A of Form 1040 (see the Tax Forms page on the navigation menu above for a copy of Schedule A).
In more precise terms, local real estate tax is a tax levied against the ownership of real estate by a city, county, municipality or like political subdivision (borough, township, village, etc.); in a similar but more spacious way, state real estate tax is a tax imposed on owners of real estate by a state or commonwealth of the United States, the District of Columbia, or a possession of the U.S. or any political subdivision thereof. And foreign real estate tax is a charge on real estate ownership by the authority of a foreign sovereign state or any of its political subdivisions. As with state tax, real estate tax is deductible in the year paid or accrued.
Matters are more complicated, however, as real estate tax is a term of art, namely, shorthand for the fact that, in addition to restrictions based on ownership and assessed value, this tax is deductible only if it is levied for the welfare of the general public. In other words, any real estate tax assessment that is in substance a tax for a local benefit or improvement to a taxpayer’s real estate in the form of, say, a sidewalk or street or a sewer, water, or solid waste disposal system is not deductible unless, and to the extent, it can be shown to be allocable to the maintenance and repair of, or interest charges on, the local benefit or improvement in question. For example, a charge, and any cost of borrowing or interest expense included in such charge, made for the purpose of maintaining a street or repairing a sidewalk would be deductible as a real estate tax. However, an itemized charge for a service made possible by a local benefit or improvement–for instance, a charge for water consumed, trash collected, or sewage disposed–is not deductible as a real estate tax.
In a larger sense, an assessment or charge the end result of which is an improvement that tends to increase the value of a taxpayer’s real property–one example being a conversion of a dirt road to a paved street–is not deductible; instead, the increase in value that results from such improvement must be added to the property’s basis.
What follows below is a laundry list of issues to consider as one works through the complex topic of real estate tax:
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If a taxpayer’s mortgage payments include real estate taxes, then only the amount actually paid by the mortgage company to the taxing authority is deductible. But a tax lien on real estate “runs” with the land; for a full discussion, click on real estate tax lien.
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A tax on real property paid during the construction period is not deductible and must be capitalized.
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Real estate tax paid at settlement or closing is deductible but must be apportioned between buyer and seller according to the number of days each party owned the property. For more information, click on real estate tax transfer.
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A tenant-stockholder of a cooperative housing organization can deduct her portion of the organization’s real property tax bill.
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If a taxpayer receives, before year-end, a refund for real estate tax paid in the current tax year, then she should reduce the total on Schedule A–Itemized Deductions by an equivalent amount. But if a refund is from a prior year, then she should, according to the tax benefit rule, include the refund in income only if, and to the extent, the related but prior deduction produced a tax benefit.
Additional relevant articles on the topic of real estate tax are listed below:
Many happy returns, Roger
State Tax
As a rule, the amount an individual pays for taxes that are not directly related to a trade or business or property held for the production of income is deductible only as an itemized deduction on Schedule A of Form 1040; this category of expense includes state taxes, specifically state income tax and state sales tax. A taxpayer has the option to deduct either state and local sales taxes or state and local income taxes, but not both categories of state tax.
If a taxpayer elects to itemize, then the payment of general state and local sales tax is deductible only if the following conditions are satisfied (”general” denotes that the sales tax is imposed at one rate for the retail sale of a broad range of personal property):
- The sales tax is imposed on personal property.
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The sales tax is based on the property’s value, that is, it has the quality of an ad valorem tax and is assessed in proportion to the value of the property.
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The sales tax is imposed annually.
If a payment for a car registration, a licensing fee, or other motor vehicle tax is based on the value of the vehicle, it is deductible for those who itemize on Schedule A.
Example: Rob Becker paid $150 to register his car in 2007; $100 of the fee is based on the value of the car and $50 on the weight of the car. Becker’s deduction is limited to $100, the amount of the registration fee that is assessed in proportion to the value of the car.
The taxpayer who elects to deduct state taxes can claim either (1) the total amount paid if it is properly substantiated, that is, supported by receipts or other appropriate documentation or (2) the amount from an Internal Revenue Service table plus any amount of state and local sales tax paid on the purchase of a motor vehicle, boat, home (including those that are mobile or prefabricated), or materials to build a home. If a taxpayer residing in more than one state during the year elects to use the IRS tables, then she must, on the basis of the number of days she lives in each state, prorate the applicable table amounts.
The deduction for sales taxes paid is, unfortunately, caught in the web of the itemized deductions phaseout for high-income taxpayers. In particular, the amount of allowable itemized deductions is reduced for those taxpayers whose adjusted gross income (AGI) exceeds a certain threshold amount by the lesser of (1) 3% of the excess AGI over the threshold amount or (2) 80% of allowable deductions. The 2007 threshold amount is $156,400 AGI ($78,200 for those married and filing separately, abbreviated as MFS) and the 2008 threshold amount is $159,950 AGI ($79,975 for MFS). The phaseout itself is being phased out: in 2006 and 2007, the phaseout is reduced by one-third, and, in 2008 and 2009, it will be reduced by two-thirds. In 2010, the phase out of the itemized deductions phaseout will be complete.
As most individuals who file a Form 1040 are cash-basis taxpayers, state taxes are usually deductible when paid, not when accrued, even if the payment is applicable to a prior tax year, or, in the case of an estimated payment, applicable to a future tax year. However, in the event a taxpayer makes an advance payment of estimated state income taxes but cannot reasonably determine whether, on the date of payment, an additional amount is due, he may be able to deduct any additional amount paid in the following year.
Finally, many states have e-file programs; click on state tax return for more information.
Additional relevant articles on state tax follow below:
Many happy returns, Roger