SALT Optimization

§ 164. Taxes(a) General ruleExcept as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued:(1) State and local, and foreign, real property taxes. (2) State and local personal property taxes. (3) State and local, and foreign, income, war profits, and excess profits taxes. (4) The GST tax imposed on income distributions. In addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income). Notwithstanding the preceding sentence, any tax (not described in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition. (b) Definitions and special rulesFor purposes of this section—(1) Personal property taxesThe term “personal property tax” means an ad valorem tax which is imposed on an annual basis in respect of personal property. (2) State or local taxesA State or local tax includes only a tax imposed by a State, a possession of the United States, or a political subdivision of any of the foregoing, or by the District of Columbia. (3) Foreign taxesA foreign tax includes only a tax imposed by the authority of a foreign country. (4) Special rules for GST tax(A) In generalThe GST tax imposed on income distributions is—(i) the tax imposed by section 2601, and (ii) any State tax described in section 2604 (as in effect before its repeal), but only to the extent such tax is imposed on a transfer which is included in the gross income of the distributee and to which section 666 does not apply. (B) Special rule for tax paid before due dateAny tax referred to in subparagraph (A) imposed with respect to a transfer occurring during the taxable year of the distributee (or, in the case of a taxable termination, the trust) which is paid not later than the time prescribed by law (including extensions) for filing the return with respect to such transfer shall be treated as having been paid on the last day of the taxable year in which the transfer was made. (5) General sales taxesFor purposes of subsection (a)—(A) Election to deduct State and local sales taxes in lieu of State and local income taxesAt the election of the taxpayer for the taxable year, subsection (a) shall be applied—(i) without regard to the reference to State and local income taxes, and (ii) as if State and local general sales taxes were referred to in a paragraph thereof. (B) Definition of general sales taxThe term “general sales tax” means a tax imposed at one rate with respect to the sale at retail of a broad range of classes of items.