How to Deduct State and Local Taxes on a 1040 Form Schedule A

A significant portion of one's itemized deductions may be the various local and state taxes that have been paid during the year.

The IRS allows a taxpayer to deduct certain state taxes, should you live in a state that has an applied income tax, as well as local taxes, qualified real estate taxes, a new vehicle tax, and other miscellaneous taxes.

Standard vs. Itemized Deductions

To start with, be aware that deductions for taxes are just one example of the various itemized deductions that are available on a Schedule A. Taxpayers need to determine which deduction they are choosing to take; both the standard deduction and the itemized deduction are available.

Choose the deduction that will yield the greater amount to be subtracted from your taxable income. The standard deduction amount varies based on your filing status, but as an example, in 2009 couples who chose to file jointly were allowed to deduct a standard amount of $11,400 from their taxable income.

If your itemized deductions, including the state and local taxes you have paid, top the standard deduction amount, then you should choose this option. Other popular itemized deductions to consider include home mortgage interest paid, medical and dental expenses, and gifts made to charity.

Non-Deductable Taxes

Here is a list of the taxes that you may have paid but you are not allowed to deduct on your Schedule A. Most taxes other than what are listed here are likely deductable.

• Federal income tax. This represents your withholding, and of course, this amount already gets applied against any potential tax due when you complete your 1040.
• Social Security and Medicare taxes that are withheld from your pay.
• Vehicle usage taxes, including gasoline tax and car inspection fees.
• License fees or taxes, such as for a marriage, a pet or your driver's license.
• Assessments on property easements, sidewalks, or home improvements.

State and Local Taxes

You must choose an option if you have state or local taxes to deduct. These can be deducted one of two ways. You can elect to deduct state and local general sales tax, or state and local income tax.

If you choose to deduct your state and local sales tax, then you are, in effect, deducting the amount of sales tax charged on most of your qualified purchases during the tax year. Qualified purchases include food, clothing, medical supplies and motor vehicles. If using this method, you must be able to provide receipts for verification as needed.

Rather than using the actual amounts spent on sales tax, you may use a table to figure a standard amount. See the instructions for the Schedule A specific to the tax year you are filing.

If you prefer to deduct your state and local income taxes paid, the following can be included:

• All state income tax withheld through your employer or payer, including amounts on forms W-2, 1009-G (state unemployment), 1099-R (pension income) and 1099-MISC (self-employment income).
• State and local income taxes paid to the state in the current tax year for a prior year, such as amounts due to the state that you were late in paying. Do not include penalties and or interest paid.
• Estimated state tax payments made.

Taxable State Refund?

If you received a refund last year from your state tax return, and you are now choosing to itemize your state and local taxes this year, then you may need to include the previous year's refund amount in your current year's income. For more information on the taxability of state refunds, see IRS Publication 525, Taxable and Nontaxable Income, under the section entitled Recoveries.

Real Estate Taxes

State and local taxes you paid on real property you own for your personal use can also be deducted. Business property does not qualify.

Your general real estate taxes paid outright or into your escrow qualify. If your mortgage payment includes both the principal due to the lender, interest on the loan, and your taxes, be cautious that you are only deducting the tax portion. Mortgage interest you have paid is also deductable but in another section of the Schedule A.

Certain expenses associated with real property maintenance are not eligible, such as a monthly charge for garbage or recyclable pickup, taxes paid on your water bill, or fees levied against you for violating town or city ordinances.

New Vehicle Tax

If you elected to deduct state and local general sales tax, rather than income tax, then you will not be able to deduct any new motor vehicle tax.

The option to deduct this tax was introduced for any qualified vehicle purchased and paid for after February 16^th of 2009. A vehicle qualifies if it is less than 8,500 lbs (most cars and light trucks are) or a qualified motor home. A worksheet on the back of Schedule A will need to be filled out to determine if you can deduct this tax.