Are Non-Ad Valorem Taxes Deductible for Income Taxes?

Federal income tax laws contain measures intended to make federal taxes work together with state and local taxes with respect to the taxpayer. Taxpayers who itemize their deductions on a Schedule A can deduct a number of state and local tax payments, reducing their federal taxable income and lowering the overall effective tax rate. Section 164 of the revenue code specifies deductible taxes.

Ad Valorem Taxes

Ad valorem taxes get their name from a Latin phrase meaning “on the value.” They are levied on real and personal property based on the value of the property. Real estate taxes are a familiar example of an ad valorem tax. Section 164 allows taxpayers to deduct taxes paid on the value of real and personal property.

Non-Ad Valorem Property Taxes

Value isn’t the only way state and local governments can tax personal property. They may levy a tax based on another attribute of the property, such as gross vehicle weight. Some may impose taxes based in part on the value and in part on another attribute. Section 164 treats taxes determined on attributes other than value as nondeductible fees. Non-ad valorem property taxes are nondeductible, and only the ad valorem portion of a composite levy is tax-deductible.

Exception

Non-ad valorem property taxes are deductible elsewhere on a taxpayer’s return under certain circumstances. If the property being taxed is used for the taxpayer’s business, the otherwise nondeductible tax counts as an ordinary business expense. Business expenses are deductible on the form appropriate to the business income, such as a Schedule C for sole proprietorship or a Schedule E for rental income.

Other Non-Ad Valorem Taxes

In addition to personal and real property taxes, states and local governments may impose other taxes, such as sales and income taxes. Typically, a taxpayer itemizing deductions can deduct all state and local income taxes paid during the tax year, even if some of the taxes are attributable to another year. A temporary provision, which Congress has extended several times in the past, gives taxpayers the option of deducting state and local sales taxes instead of income tax.

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