05:33 PM EDT on Monday, April 4, 2005

By Neil Downing / The Providence Journal

Suppose you own your house and have to pay a sewer assessment to your city or town. Whether you pay it in a lump sum, or in installments over time, can you deduct it on your federal income-tax return? That's the question a man from Warwick asked MoneyLine:

Q: I paid my Warwick sewer assessment in full last year. Is that payment treated as real-estate taxes that I can report on my itemized deductions, just as I do my regular property taxes?

B.K., Warwick

A: Unfortunately, no.

Federal tax law generally lets you deduct taxes you pay on "real property" — in other words, real-estate tax.

To claim the break, you must list your deductions separately (a process known as "itemizing," on Schedule A of your U.S. Form 1040), instead of claiming the lump-sum deduction (known as the "standard deduction") on your federal income-tax return.

Most taxpayers claim the standard deduction. But suppose you do itemize. Can you deduct a municipal sewer assessment charge?

No, said Joseph P. Matoney, professor of accounting at the University of Rhode Island. "It is not a tax, it's a fee," said Matoney, a CPA who also runs his own tax-consulting practice in Wakefield.

"An assessment is typically levied as a fee" by a city or town (or other government agency), often to build or extend a municipal sewer or water system, said Mark M. Higgins, professor of accounting at URI and coauthor of the textbook Concepts in Federal Taxation.

It's a kind of service fee, from which you receive a direct benefit, Higgins and Matoney said in an interview at the URI campus in Kingston.

U.S. Treasury regulations make it clear that you cannot deduct "taxes assessed against local benefits of a kind tending to increase the value of the property assessed."

The rules say that "assessments, paid for local benefits such as street, sidewalk, and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied, are not deductible as taxes."

Internal Revenue Service Publication 17, "Your Federal Income Tax," puts it this way:

"Deductible real estate taxes generally do not include taxes charged for local benefits and improvements tending to increase the value of your property. These include assessments for streets, sidewalks, water mains, sewer lines, public parking facilities, and similar improvements. You should increase the basis of your property by the amount of the assessment."

You also cannot deduct sewer-usage fees — whether you pay a flat amount or an amount that varies depending on your usage, said Gregory A. Porcaro, president of the Rhode Island Society of Certified Public Accountants.

For a detailed list of what taxes — and fees — you can and cannot deduct, see Publication 17, as well as IRS Publication 530, "Tax Information for First-Time Homeowners." For your free copy of either or both, visit your local IRS office, or call the IRS toll-free at 1-800-829-3676. The booklets are also available for download at www.irs.gov/formspubs.

TODAY'S TIP: The Federal Citizen Information Center has an interactive CD you can use to learn the basics about money — how to manage it, save it, invest it and make it work for you.

Ideal for youngsters, the CD — "Hands-on Banking" — can also help adults brush up on the fundamentals. There are four separated programs, from fourth grade through adult, that offer tips on budgeting, saving, maintaining good credit and other topics. The narrated lessons are in English and Spanish.

For a free copy, call the center toll-free at 1-888-878-3256 and ask for Item 641M. Or send your name and address to: Federal Citizen Information Center, Dept. 641M, Pueblo, Colo. 81009. Find out more about this and other items the center has at www.pueblo.gsa.gov.

MoneyLine correspondent Neil Downing is a staff writer for The Providence Journal in Rhode Island and author of "The New IRAs and How to Make Them Work for You." Do you have questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail moneyline@projo.com.

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