Can We Deduct State and Local Sales Taxes We Paid to a Contractor with Funds from an Insurance Company?

[Faustind]

We live in Texas. During 2023, we had significant water damage to our home from an upstairs toilet breakage, for which we were given money from our Homeowner's Insurance to pay contractor's to repair our home. Of course, the insurance didn't quite cover all of our expenses. Anyway, we ended up paying a substantial amount of State and Local Taxes to these contractors, and we are wondering if we can deduct the State and Local Taxes we paid to the contractors from our Federal Income Taxes, even if the source of some of the payments was from our insurance company? Thank you for your kind attention.

[xmasbaby0]

Money you received from your insurance company cannot be deducted on your federal tax return.

[Vanessa A · Accepted solution]

It depends on if you paid the taxes or the insurance company did and whether you are itemizing your return or taking the standard deduction.  You cannot take a deduction for any part of the taxes that your insurance company paid.  You can only claim what you actually "wrote the check" for.  For the amount you actually paid, if you are itemizing your return, then yes, you can include this as a deduction on your return.  If you are taking the standard deduction, then no, you would not receive a deduction for your state and local taxes. 

 Itemized expenses include mortgage interest, state and local taxes up to $10,000, medical expenses in excess of 7.5% of your AGI and casualty and losses in excess of 10% of you AGI with the first $100 not counting towards the loss. The State and Local Tax deduction does max out at $10,000 regardless of your income.   So if your total itemized deductions are less than your standard deduction, then you would not benefit from any of the sales tax the you paid on your return.