When you file your 2016 federal income tax return next year, you have the option to take a standard deduction. For 2016, that’s $6,300 for single taxpayers and for married individuals filing separately; $12,600 for couples filing jointly and for certain widow(er)s; and $9,300 for those filing as heads of household. (If you haven’t yet filed your 2015 return, the numbers are the same, except $9,250 for heads of household.) The beauty of taking the standard deduction is that it’s simple: There’s no need to gather information and scant risk of triggering an audit.
However, taking the time to itemize deductions can be a tax saver. If your itemized deductions exceed the standard amounts, you’ll generally come out ahead by listing them on Schedule A of Form 1040. Indeed, deducting taxes paid under the “Taxes You Paid” section may be enough to justify itemizing.
Deducting Taxes Paid on Property Tax
You can itemize the property tax you pay for your home. If you have a second home, the tax on that property also can be deducted. In fact, you can deduct any amount of tax you pay on any number of homes that were not used for business, even if they’re in different states or out of the United States.
The key here is to deduct the payment for the year in which it was paid. If you have a property tax payment due in January or February 2017, for instance, and you send in the payment in December 2016, that amount can be an itemized deduction in 2016.
If you make monthly mortgage payments on a home, a portion of each payment might go into an escrow account for eventual forwarding to the property tax collector. In this scenario, the property tax payments are deductible for the year in which the money is actually paid out of the escrow account to the taxing authority. So-called “local benefits taxes” paid by property owners may or may not be deductible, depending on how the money is used. Our office can determine whether you can deduct such taxes. You also may be able to deduct personal property tax, assessed on the value of items, such as boats or cars.
State and local income tax you pay also can be deducted on Schedule A. That includes amounts withheld from paychecks as well as any estimated state or local estimated income tax you pay during the calendar year.
For many years, taxpayers have had the option of deducting state and local sales tax instead of state or local income tax, if that provided a greater deduction. This provision expired several times, only to be renewed. Late in 2015, Congress passed a tax act that makes this choice of deductions permanent, retroactive to 2015.
A sales tax deduction obviously appeals to residents of states or localities with no income tax. If you live in an area with an income tax—and if you are itemizing deductions—you should see which choice provides the greater tax savings.
Example 1: Marge Collins pays enough property tax to make itemizing worthwhile. When getting her records together for tax preparation, Marge discovers that she paid a total of $3,000 in state income tax. Marge also should see how much sales tax she paid. If the total exceeds $3,000, she probably should deduct sales tax instead of state income tax.
How can Marge determine the amount of sales tax she paid? One way is to go through all of her receipts for the year, and calculate the sales tax she paid on purchases. Many people don’t keep all their receipts, though. If you’re in that category, you can use the optional sales tax table provided by the IRS, in the instructions to Form 1040.
That table shows the amount of the sales tax you’re estimated to have paid in the relevant year, depending on your income, where you live, and the exemptions you claim. Note that “income,” for this purpose, includes not only your adjusted gross income but also inflows such as tax-exempt interest and nontaxable Social Security benefits. The greater your income, the more sales tax you’re presumed to have paid.
What’s more, the IRS tables don’t assume you have made any large purchases. Thus, the resulting amount from the tables can be increased by any sales tax you paid for a car (bought or leased), motorcycle, boat, airplane, motor home, or similar items.
For 2015 tax returns, a Sales Tax Deduction Calculator was offered at irs.gov. The IRS asked for a few simple entries in order to illustrate the amount of state and local sales tax you could claim. Assuming the same calculator is available for 2016 tax returns, this calculator may help you get your records ready for tax preparation next year as well.