Learn About Personal Property Tax Deduction
Individuals can deduct personal property taxes paid during the year as an itemized deduction on Schedule A. Personal property taxes are taxes that are imposed by a state or local tax authority based on the value of an individual’s personal property. Another term for personal property tax is an ad valorem tax. An example of personal property tax is the tax imposed on the value of a car and assessed as part of an annual vehicle registration fee.
What's Eligible to be Deducted as Personal Property Tax
The tax code defines personal property tax pretty simply. "The term 'personal property tax' means an ad valorem tax which is imposed on an annual basis in respect of personal property." (Internal Revenue Code section 164(b)(1).)
Treasury Regulations spell out three criteria for being able to deduct personal property taxes:
- The tax must be an ad valorem tax based on the value of the property.
- The tax must be imposed annually.
- The tax must be imposed on personal property. (Treasury Regulations 1.164-3(c))
A Portion of Vehicle Registration Fees Could be Deducted as Personal Property Tax
Vehicle registration fees sometimes are based partly on the value of the property and partly on other factors. The portion based on the value of the property can be deducted for tax purposes. In Publication 17 the IRS advises,
"A tax ... can be considered charged on personal property even if it is for the exercise of a privilege. For example, a yearly tax based on value qualifies as a personal property tax even if it is called a registration fee and is for the privilege of registering motor vehicles or using them on the highways.
The IRS gives the following example of how to deduct the personal property tax portion of a vehicle registration fee:
Example. "Your state charges a yearly motor vehicle registration tax of 1% of value plus 50 cents per hundredweight. You paid $32 based on the value ($1,500) and weight (3,400 lbs.) of your car. You can deduct $15 (1% × $1,500) as a personal property tax because it is based on the value. The remaining $17 ($.50 × 34), based on the weight, is not deductible." (From Publication 17, chapter 22, section on Personal Property Taxes.)
Personal Property Taxes on Business Equipment
Personal property tax paid on equipment used in a trade or business can be deducted as a business expense.
Some local governments assess personal property taxes on equipment and furniture used in a business. This would be deducted on the tax return for that business. For sole proprietors, such taxes would be deducted on their Schedule C. The IRS advises,
"Personal property tax. You can deduct on Schedule C or C-EZ any tax imposed by a state or local government on personal property used in your business. You can also deduct registration fees for the right to use property within a state or local area." (IRS.gov, Publication 334, Tax Guide for Small Businesses, section on Taxes.)
If personal property is used partly for business and partly for personal use, then the business portion is deducted as a business expense and the remainder as a personal deduction on Schedule A. The IRS gives the following example in Publication 334:
"May and Julius Winter drove their car 7,000 business miles out of a total of 10,000 miles. They had to pay $25 for their annual state license tags and $20 for their city registration sticker. They also paid $235 in city personal property tax on the car, for a total of $280. They are claiming their actual car expenses. Because they used the car 70% for business, they can deduct 70% of the $280, or $196, as a business expense."
Keep any documents that specify how much personal property tax you paid during the year. For example, this might be an annual vehicle registration statement. The vehicle registration statement may indicate what portion of the registration fee qualifies to be deducted as personal property tax.
Impact of the Alternative Minimum Tax
The deduction for personal property taxes is an adjustment item for calculating the alternative minimum tax (AMT). What this means is that personal property taxes are deductible when calculating the regular federal income tax, but not deductible when calculating the AMT. People who are impacted by the AMT will obtain little or no reduction in their federal tax liability by using the personal property tax deduction.
- Treasury Regulations 1.164-3(c)
- Publication 17, chapter 22, section on Personal Property Taxes
- Tax Topic 503, Deductible Taxes
- Schedule A [pdf]
- Instructions for Schedule A, Line 7