Deducting State and Local Taxes

Each state has different tax laws. The following states do not have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire taxes only interest and dividend income, and income from an unincorporated business, rental or farm activity. Tennessee taxes interest and dividend income only. If you live in one state and work in another, you may have to file a state return in both states.

If you itemize income tax deductions, you have the option of claiming your state and local sales tax or state and local income tax for the year. Be sure to determine which amount will be larger, because you can't claim both.

If you choose to deduct income tax, include your withholding and estimated tax payments for the current year as well as any balance due from a prior year. If you credited an overpayment from last year's tax return to this year's estimated tax payment, be sure to include that amount too. If you're subject to Alternative Minimum Tax (AMT) and have a state tax refund, it may be better for you to claim the sales tax deduction even if it's smaller than the state income tax deduction. The reason is that the state income tax refund isn't taxable if you claim the sales tax deduction. Be sure to prepare your return both ways.

If you choose to deduct sales tax, you can deduct either the actual amount you paid or the amount from the table in the Schedule A instructions. You can add to the amount in the table the sales tax you pay on a car as well as other items specified in the instructions.

  
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Laws on this topic may vary from state to state. This content is not meant to provide you with complete information and it is not intended to be legal or tax advice. It is recommended that you consult with your own attorney, accountant or other advisor regarding your specific situation.