IRS Schedule A deductions can lower your tax bill

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Payments and tax © Claudio Divizia/

The ability for taxpayers to write off state and local taxes is now available every year.

By itemizing deductions, you can subtract many nonfederal taxes you pay from your federal income. The less income you have, the less you owe Uncle Sam.

State bills lower federal taxes

For folks who itemize, allowable deductions on 2015 returns include state and local income taxes or, for some filers, sales taxes paid throughout the year, along with real estate taxes, personal property taxes and intangible taxes on investments.

If you paid estimated taxes to your state revenue department, don't forget to add those amounts to the state income taxes that were withheld from your paychecks throughout the year.

And taxpayers in California, New Jersey, New York, Rhode Island and Washington may deduct mandatory payments made to those states' disability and compensation funds. Employee contributions to private or voluntary disability programs are not deductible. Schedule A even offers itemizing taxpayers a catchall line (line 8) for "other" taxes. Here, you can deduct occupational taxes or any foreign income taxes.

Foreign taxes are not that unusual, especially for investors whose holdings include mutual funds that invest -- and pay dividend taxes -- overseas. If that's the case, you'll find the foreign tax amount in box 6 of the Form 1099-DIV that your fund manager has sent you. This amount may be worth more tax savings to you, however, as a credit on line 48 of your Form 1040.

Permanent sales tax break

One of the most popular itemized deductions is the write-off for state and local taxes. For many years, this option was uncertain. The tax break was part of a package of tax laws that were temporary and had to be periodically renewed, sometimes retroactively, by Congress.

That is no longer an issue.

As part of the Protecting Americans from Tax Hikes, or PATH, Act, which became law in December 2015, the state and local taxes deduction is now a permanent part of the tax code.

Don't go overboard

But don't get carried away in deducting taxes. There are some payments that Uncle Sam won't allow you to subtract from your federal income, including:

  • Federal excise taxes.
  • Social Security and Medicare, or FICA, taxes.
  • Federal unemployment, or FUTA, and railroad retirement, or RRTA, taxes.
  • Customs duties.
  • Federal estate and gift taxes.
  • State gasoline taxes.
  • Car registration and inspection fees.
  • Transfer, or stamp, taxes on the sale of property.
  • License fees, such as driver's, marriage or pet tags.
  • Assessments for sidewalks or other property improvements.
  • Parking and traffic tickets or other fines.
  • And if you paid any tax penalties or interest, sorry. These charges aren't deductible either.

Deducting vehicle and local sales taxes

If you bought a motor vehicle in 2015, sales tax paid on that purchase can be added to the rest of the sales tax amount you deduct on Schedule A.

And what, in the IRS' estimation, is a motor vehicle? The definition includes cars, motorcycles, motor homes, recreational vehicles, sport utility vehicles, trucks, vans and off-road vehicles. You also can deduct the sales tax paid on a plane or boat if the tax rate was the same as your state's general sales tax rate.

Just add the vehicle's (or boat's or plane's) sales tax amount to the state and local sales tax amount you enter on line 5b of Schedule A. For most filers, the amount of general sales tax is found in the tables provided for each state in the Schedule A instructions.

Also be sure to calculate your more local sales tax payments, those amounts charged by many cities and counties.

The Schedule A instructions also include tables for these local sales taxes. Most taxpayers will let their tax software calculate their total state and local sales tax amounts. If you prefer paper, check out the worksheet in the Schedule A instructions. Or you can figure your deduction by using the sales tax deduction calculator at the IRS website.


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