How to Deduct State Taxes From Federal Taxes

One of the tax deductions the Internal Revenue Service (IRS) allows is for state income taxes you pay or state sales taxes, but not both. If you live in a state without an income tax, you can still claim the state sales tax deduction. To claim the deduction for state income taxes, you must itemize your deductions, which means filing your taxes using Form 1040 and not claiming the standard deduction.

Things You'll Need

• Schedule A
• W-2 form

Instructions

1. Calculate how much state income tax you paid. Simply add the totals of your state income tax withholding amounts listed on your W-2 forms to any amount paid in the current or prior year. For example, if you paid $500 in state taxes for 2008 in March 2009, you would include that $500 in your total.

2. Calculate how much state sales tax you are eligible to deduct. You can save all your receipts from your purchases during the year or use the IRS' sales tax deduction calculator, available online (see Resources).

3. Use the greater of the two for your itemized deduction. Either check the income tax box on Schedule A, Line 5a, if you are claiming state income taxes or the general sales tax on Line 5b if you are claiming state sales taxes. You cannot claim both.

4. Write the amount of your deduction on Line 5 of Schedule A. This will reduce your taxable income.

Tips & Warnings

• When calculating your total state income in Step 1, you cannot include any penalty or interest payments that you paid on your state income taxes.

References

• IRS: Instructions for Schedule A
• IRS: Topic 503 -- Deductible Taxes
• Kiplinger: The Most-Overlooked Tax Deductions; Kevin McCormally

Resources

• IRS: Tips and Guidance for Determining Sales Tax Deduction
• IRS: Schedule A -- Itemized Deductions