Deductible Taxes & Interest (August 2016)

Tax Tips

Deductible Taxes & Interest

By Michael Aston, E.A.
Alhambra Tax Center

We can claim certain taxes and interest paid on Schedule-A (Itemized Deductions).

TAXES PAID

1.     State, Local and foreign income taxes:
For California residents, this will be the state taxes and SDI that you paid. On your W-2 it should be box numbers 17 and 19, even though SDI may be listed in box 14 instead of 19 on most w-2’s. You will also be able to deduct any state estimated payment and state taxes due for the year paid. If the taxpayer receives VPDI instead of SDI, the VPDI is not deductible. Please note, if the taxpayer uses this option as a deduction, a state refund will become taxable the following year.

2.     State and local general sales tax:
If using this option, the taxpayer can’t use option 1 above, it is either option 1 or 2 not both. If choosing this option, the taxpayer can save all their receipts and deduct the sales tax or use what is called a safe harbor method, which is based on the taxpayer’s income. If using the safe harbor method, the taxpayer can add the sales tax for a vehicle or boat to the safe harbor amount as a deduction.

 

3.     State, local and foreign real estate taxes:
In most cases, all of the county property tax that is paid is a deduction on the schedule A. Some of the exceptions is any assessment included in the property tax for streets, sidewalks and sewer lines. There are other rare items that may be included in the property tax, more information can be found in IRS Publication 551. Also, please note the exceptions can be applied to the basis of the taxpayer’s house.

4.     State and local personal property tax:

Deductible personal property taxes based on the value of personal property such as a vehicle is deductible. The most common is the VLF (Vehicle License Fee) that the DMV imposes each year based on the value of the taxpayer’s vehicle.

INTEREST PAID

1.     Home Mortgage Interest:
A home mortgage is any loan that is secured by your main home or second home. It includes first and second mortgages, home equity loans and refinanced mortgages. There are some
limits on how much can be deducted, see IRS Publication 535.

2.     Points/Origination Fees:
In most cases the original fees can be deducted in the year that the house is purchased with the option of amortizing the fees over the life of the loan. Fees from a remortgage must be amortized over the life of the loan.

3.     Mortgage Insurance Premiums:
This is insurance provided by the Department of Veterans Affairs or Rural Housing Service. More information can be found in IRS Publication 936.

4.     Investment Interest:
As stated in the schedule A instructions, “Interest paid on money you borrowed that is allocable to property held for investment. It doesn’t include any interest allocable to passive activities or to securities that generate tax-exempt income.”

IRS Publication 550 and 936, goes into a more in depth situations with Interest paid.

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