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Like most Americans, you probably pay more than just federal income taxes. If you itemize deductions (rather than take the standard deduction), you can write off other types of taxes you paid at the state and local levels.
Here’s a partial list of nonfederal taxes that can be deducted:
- State and local income taxes
- Sales taxes
- Real estate taxes
- Personal property taxes
- Intangible taxes on investments
State taxes reduce federal bill
The write-off for state and local taxes is one of the most popular itemized deductions. For many years, it had to be renewed each year by Congress, but it became a permanent part of the tax code in 2015.
Taxpayers can choose to deduct either state income tax or sales taxes, but not both. If you choose to deduct state income taxes and 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.
Deducting vehicle and local sales taxes
If you bought a motor vehicle in 2016, sales tax paid on that purchase can be added to the rest of the sales tax amount you deduct.
The IRS definition of a motor vehicle 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.
Standard amounts of general sales tax are found in the tables provided for each state in the Schedule A instructions. If you use tax software, it will calculate your total state and local sales tax amounts.
Thinking about buying a new motor vehicle? Check auto rates at Bankrate.
Other deductible state payments
If you work for a company in one of the states below and make mandatory contributions to the state’s unemployment, worker’s compensation or disability fund, you can deduct those payments as well:
- New Jersey
- New York
- Rhode Island
Foreign taxes are deductible, too
You also 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.
Taxes that cannot be deducted
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 drivers, marriage or pet tags.
- Assessments for sidewalks or other property improvements.
- Parking and traffic tickets or other fines.
- Tax penalties and interest.
Bankrate’s tax-deductible loan calculator can help you figure out your tax savings if you take out a loan or line of credit with tax-deductible interest payments.