Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 21

Tax Payments

There are various types of taxes, including income, property, and sales. Some taxes are deductible and some are not.

Deductible taxes that are personal in nature, such as a taxpayer's state income taxes, are deductible only as an itemized deduction on Form 1040, U.S. Individual Income Tax Return, Schedule A, Itemized Deductions. However, taxes related to rental real estate or to a trade or business do not have to be itemized to be deducted on other appropriate forms or schedules (e.g., Schedule E, Supplemental Income and Loss, for rental real estate). The deduction for the employer-equivalent portion of federal self-employment tax paid is claimed as an adjustment to gross income (see Chapter 17).

Foreign income taxes can either be deducted as an itemized deduction or used to calculate a foreign tax credit. Taxpayers may choose the more favorable option.

Tests for Deducting Taxes

A taxpayer can deduct taxes only if three tests are met:

1. The tax is imposed on the taxpayer.

2. The taxpayer pays the tax during the year.

3. The tax is a deductible tax (e.g., it is not a special assessment that increases property value.)

A tax may be imposed on a taxpayer who owns property, receives compensation that is taxable at a state or local level, or for other reasons. If one spouse owns real estate and pays the taxes on it, the taxes can be deducted on that spouse's separate return or on a joint return.

In determining whether the tax has been paid during the year, ...