Deducting State And Local Taxes As Itemized Deductions

Several types of state and local taxes are deductible on a federal income tax return. To deduct state and local taxes, individuals must itemize their deductions. Tax filers reduce both their taxable income and their net federal tax by maximizing their deductions for state and local taxes paid.

Each tax filer can choose between either itemizing their deductions or claiming a standard deduction amount. All itemized deductions are reported on IRS Schedule A, which is a supporting form for Form 1040.

All deductions on Schedule A must be personal in nature. Taxes related to a rental property or a small business are deducted on separate forms for those activities. Schedule A contains a section designated for the deductible state and local taxes you paid.

Real estate tax

The largest single itemized deduction for many tax filers is interest paid on a home loan. For tax filers who own their home, real estate property tax is typically the second largest itemized deduction. If you pay your property tax bill yourself, the deductible amount is shown on the official tax statement. Alternatively, your property tax may be included as part of your monthly payment and reported on your annual mortgage statement.

State income tax

Taxes paid or withheld for state income tax purposes are deductible on your federal return. In addition to withholding from an employer, you might have paid additional amounts in state income tax during the year. A few states have no personal income tax, and Schedule A allows you to deduct sales tax instead of state income tax.

Sales tax option

A federal tax filer who itemizes can deduct either state income tax or sales tax, but not both. If sales tax is deducted, there are two options to determine the deduction. All of your sales tax receipts for the year can be totaled, or you may use sales tax tables provided by the IRS. For most tax filers, it is more practical to use the tables. The IRS provides a useful online calculator to determine your sales tax deduction.

Personal property tax

Property taxes based on the value of personal property are deductible. The most common personal property tax is a local tax on automobiles. A tax based on the weight of an automobile is not deductible as an itemized deduction.

Since federal tax is being determined, federal withholding is not an itemized deduction. Social security tax and Medicare tax are not deductible. License fees are not deductible, such as those for a marriage license or a driver's license.

Once your itemized deductions exceed your standard deduction amount, it becomes advantageous to add on all possible deductions. Contact a tax preparer (like those like Tri Check Inc) for more information about the tax advantage of itemizing deductions.