Deducting State and Local Income Taxes
Updated: May 18
Most individual tax payers follow the cash receipts and cash disbursement basis rules. This means income is income in the year you receive or are entitled to receive the income. Expenses are expenses in the year you pay the expense. You can make the payment in cash, by check or by credit card. So, in order to deduct a tax payment you must actually pay it. If you pay your real estate taxes to the bank as part of your mortgage payment, you can only deduct the amount the bank actually disbursed to the town. When you make the payment to the bank, the bank is acting as your agent; they are holding your money. When the bank makes the payment, it is as if you are making the payment to the town yourself.
Another requirement to deduct state or local taxes is the tax liability must be yours. If you paid my property tax, I am happy and the town is happy, but I can’t deduct the payment because I didn’t make the payment. You can’t deduct the payment you made because the liability wasn’t yours
Deductible real estate taxes are any state, local, or foreign taxes on real property levied for the general public welfare. You can deduct these taxes only if they are assessed uniformly against all property under the jurisdiction of the taxing authority. The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you.
If for some reason you did not make any real estate tax payments to your town in 2016, you weren’t able to take a deduction because you didn’t make the payments even though they were due. If in 2017 you paid the past due 2016 real estate tax plus 2017’s payments then you can deduct both year’s taxes on your 2017 income tax return.
So, what about paying the first two quarter’s of 2018’s real estate taxes in advance in 2017? If you pay 2018’s taxes you passed the cash disbursement rule. The first two quarter’s real estate taxes have been assessed by the taxing authority. They just aren’t yet due. The IRS is silent on the topic, but I’d say go ahead make the payments and take the deduction.
One final thought, look out for the Alternative Minimum Tax. State and local tax deductions are AMT tax preference items. You might save on income taxes but, you might wind ou paying some or all of the savings back as Alternative Minimum tax.