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. In the case of ad valorem taxes, taxpayers can deduct property taxes on their income tax returns, but non-ad valorem taxes typically are not allowed as deductions, with a notable exception allowed for business expenses.
You can't deduct non-ad valorem taxes on your income tax return, with the exception of non-ad valorem taxes that may be deductible for your business.
Ad Valorem Taxes
Ad valorem taxes get their name from a Latin phrase meaning “on the value.” They are levied annually on real and personal property based on the value of the property. Real estate taxes are a familiar example of an ad valorem tax. In comparison, sales taxes are considered transactional taxes, which are levied at the time of each transaction.
IRS Code 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.
Exploring Exception To Tax Rules
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.
Evaluating 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.
Combined Tax Bill
In some states such as Florida, a taxpayer's bill includes both ad valorem taxes and non-ad valorem taxes. For example, the tax for a homeowner's property (ad valorem tax) is also included on the same tax bill that includes services such as fire and rescue, solid waste collection and stormwater utility (non-ad valorem taxes). Only the ad valorem portion is deductible on your federal tax return.
- Cornell University Legal Information Institute: 26 USC Sec 164 - Taxes | Title 26 Internal Revenue Code
- Internal Revenue Service: Tax Topics - Topic 503 Deductible Taxes
- Vehicle Taxes–Title Ad Valorem Tax (TAVT) and Annual Ad Valorem Tax | Georgia Department of Revenue
- Florida Tax Collector: Non-Ad Valorem Assessment
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.