Deductible Taxes
Overview
This guide has been updated for OBBBA 2025
The landscape of itemized deductions has undergone significant changes as a result of the OBBBA in 2025. This chapter of the Big Book of Taxes delves into these pivotal modifications, focusing on the alterations affecting state and local tax (SALT) deductions. The TCJA initially capped the SALT deduction at $10,000, a limit that has dictated taxpayer strategies for recent years. However, starting in 2025, the ceiling has been raised to $40,000, offering enhanced flexibility and savings potential for many taxpayers. This section analyzes the revised deduction thresholds, phase-outs, and compliance requirements.
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Deductible taxes generally must be imposed on the taxpayer
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Must be paid during the tax year
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Taxes are NOT deductible for AMT purposes
Related IRS Publications and Forms
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Publication 17 – Your Federal Income Tax
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Publication 525 – Taxable and Nontaxable Income
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Instructions – Form 1040
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Instructions – Form 1040 (Schedule A&B)
Generally, the following taxes are deductible:
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Real Property Taxes - Home and Investment (but not including foreign real property for years after 2018). Caution – Generally taxes are only deductible if the taxpayer is on title to the property, and if so, the taxpayer can deduct the portion he or she paid. A frequently raised question relates to equitable or beneficial interest permitting a deduction. Courts have allowed it in very narrow and limited applications.
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Personal Property Taxes - This includes the personal property taxes on boats, aircraft, vehicles, etc.(Many of the taxes are combined with and must be separated from registration fees.)
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Foreign Income Taxes Paid (Note: It is generally always better to take the foreign tax credit.)
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State and Local Income or Sales Tax - Taxpayers have the option of deducting on Schedule A the LARGER of:
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State and local income tax paid, or
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State and local sales tax paid during the year.
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State Early (pre-age 59-1/2) Withdrawal Penalties - For premature distributions from retirement plans(Chief Counsel Memo 20072201F)
Caution
The Early Withdrawal Penalty is included in the state balance due and may have already been deducted as part of state income tax paid. Don’t double up!