When filing individual income tax returns, you have the option to itemize deductions or take the standard deduction. For 2015, the standard deduction amounts are as follows:
|Filing Status||Standard Deduction Amount|
|Married Filing Jointly||$ 12,600|
|Head of Household||$ 9,250|
While taking the standard deduction is an easier approach (i.e., no requirement to gather documentation and little risk of triggering an examination), itemizing your deductions often results in a larger overall deduction to taxable income. The Internal Revenue Service (IRS) allows six (6) basic types of itemized deductions, and they are grouped into the following categories:
- Medical and Dental Expenses,
- Taxes You Paid,
- Interest You Paid,
- Gifts to Charity,
- Casualty and Theft Losses, and
- Job Expenses and Certain Miscellaneous Deductions
The “Taxes You Paid” category is subdivided into three (3) types of deductible taxes, as listed below:
- Real Estate Taxes,
- State/Local Income Taxes OR Sales Taxes, and
- Personal Property Taxes
A detailed explanation of deductible tax payments follows.
Real Estate Taxes
Taxes you paid on real estate (i.e., your home and other land/buildings) not used for business can be deducted in the year paid. If you have a second home, the tax paid on that property can also be deducted (as long as it is not used for business). In fact, you can deduct taxes paid on any number of properties that were not used for business. Just remember, real estate taxes are only deductible in the year payment was issued.
It is common for a portion of monthly mortgage payments to be placed into an escrow account that eventually gets paid to tax collectors. In this case, tax payments are deductible for the year in which the mortgage company disburses funds to the taxing authority. Your mortgage company should issue an annual 1098 tax document that reports the amount of real estate taxes paid, as well as, the year payment was issued. Be sure to provide this document to your tax preparer each year.
State/Local Income Taxes OR State/Local Sales Taxes
Income taxes paid to state and local municipalities represent another type of tax deductible on Schedule A of your federal income tax return. This includes amounts withheld from paychecks (and reported on W-2) as well as estimated taxes paid during the year.
You also have the option of deducting state and local sales taxes in lieu of income taxes, should this provide a greater deduction. This election is especially attractive to residents of states with no income tax (Texas residents, for example). If you live in a state with an income tax (Louisiana, for example), I recommend figuring your deduction using both options in order to determine the greater tax savings.
Personal Property Taxes
A deduction is allowed for state and local property taxes on personal property (i.e., tangible property other than real estate) if the tax was based on value alone. For example, you paid an annual registration fee on your car, and all or a portion of the fee (i.e., tax) was based on the car’s weight.