One of the categories of deductible taxes for your federal income tax return is state and local property taxes. This is one of the most ubiquitous forms of local taxes, much more common than city income tax. However, just because your city charges you a fee because you own a car, boat or other property doesn't mean it qualifies for the deduction. If it does, you can use it to save a few more dollars on your taxes.
You can deduct city property taxes on your federal tax return if you itemize your deductions instead of taking the standard deduction.
Qualifying State and Local Deductions
Qualifying city property taxes in states with local taxes must be based on the value of your personal property rather than being a flat rate. For example, if a city charges every car a $50 fee regardless of how much it's worth, you can't deduct that as a personal property tax. In addition, the tax has to be charged on an annual basis, but you may pay it less than once per year.
Your receipt should show you whether the fee is based on the value of your property or a flat fee. If part is based on value and part is a flat fee, you can only deduct the portion based on the value of the car.
Service Taxes Not Included
You cannot include taxes paid for services as a city property tax deduction on your income taxes. For example, if you are charged for sewer fees or garbage collection fees, those aren't included in the property taxes deduction. Similarly, if you pay a local benefit tax that goes toward sidewalks or streets, those costs aren't deductible, either.
Itemizing Deductions Vs. Standard Deduction
You can only deduct your city property taxes if you itemize your income tax deductions. When you itemize, you replace your standard deduction with the total of your itemized deductions. As a result, it only makes sense to claim your personal property taxes if all of your itemized deductions exceed your standard deduction.
Other itemized deductions include state and local income taxes, gifts to charity, medical expenses and mortgage interest. The value of the standard deduction depends on your filing status and adjusts annually with inflation.
Reporting City Tax Deductions
Report the amount of city taxes paid on line 5c of Schedule A of Form 1040 when you file your taxes. This amount is added to your other deductible taxes, and the total gets reported on line 7. Then, your totals for each of the different categories of itemized deductions is combined, and the total goes on line 17 of Schedule A and line 8 of Form 1040, replacing your standard deduction.
Sales Taxes and Income Taxes
Separately, you can choose whether to deduct state and local sales tax or income tax. Income and sales tax by state authorities can vary a great deal from state to state, so which one makes more sense will vary based on your personal situation and the state you live in.
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