Save taxes on your taxes

This is part of a continuing series of posts about everything everyone should know about the federal income taxes that you pay:

Minnesota Tea Part 2011 tax day protest by Fibonacci Blue, on Flickr

State and local income taxes are deductible from your federal tax return if

1. you paid them during the year, 
2. if they were imposed on your self or your property and
3. you file Schedule A (i.e. you itemize your expenses).

These deductible taxes include state and local income taxes withheld from your pay.  You can also deduct state and local taxes that you paid with state and local tax returns.  

Taxpayers have the option to deduct sales taxes instead of state and local income taxes.  This makes sense if you live in a state like Florida or Texas, which doesn’t impose an income tax, but still has hefty sales tax rates.  Use two methods to compute state sales taxes paid:  (1) keep your receipts and (2) try the IRS’ sales tax calculator.  Use whichever technique gives you a higher sales tax deduction.

You can also deduct property taxes paid for the home that you own, even if property taxes were paid out of an escrow account (for example, you make a monthly payment to your mortgage company, and  property taxes are then paid out of the escrow account).

State and local employment taxes deducted from your pay (such as state unemployment tax), local government fees (such as water and sewer bills), and federal taxes are not deductible.

Taxation trivia: If you deduct state and local income taxes one year, then any refund you receive on a state or local tax return will be taxable in the next year.