This section discusses the deductibility of state and local income taxes (including employee contributions to state benefit funds), and foreign income taxes.taxmap/pub17/p17-117.htm#en_us_publink100033956
You can deduct state and local income taxes. However, you can elect to deduct state and local general sales taxes instead of state and local income taxes. But you cannot deduct both taxes in the same year. taxmap/pub17/p17-117.htm#en_us_publink100033957
You cannot deduct state and local income taxes you pay on income that is exempt from federal income tax, unless the exempt income is interest income. For example, you cannot deduct the part of a state's income tax that is on a cost-of-living allowance that is exempt from federal income tax. taxmap/pub17/p17-117.htm#en_us_publink100033958
Your deduction may be for withheld taxes, estimated tax payments, or other tax payments as follows.taxmap/pub17/p17-117.htm#en_us_publink100033959
You can deduct state and local income taxes withheld from your salary in the year they are withheld. For 2008, these taxes will be shown in boxes 17 and 19 of your Form W-2. You may also have state or local income tax withheld on Form W-2G (box 14), Form 1099-MISC (box 16), or Form 1099-R (boxes 10 and 13). taxmap/pub17/p17-117.htm#en_us_publink100033960
You can deduct estimated tax payments you made during the year to a state or local government. However, you must have a reasonable basis for making the estimated tax payments. Any estimated state or local tax payments that are not made in good faith at the time of payment are not deductible. For example, you made an estimated state income tax payment. However, the estimate of your state tax liability shows that you will get a refund of the full amount of your estimated payment. You had no reasonable basis to believe you had any additional liability for state income taxes and you cannot deduct the estimated tax payment. taxmap/pub17/p17-117.htm#en_us_publink100033961
You can deduct any part of a refund of prior-year state or local income taxes that you chose to have credited to your 2008 estimated state or local income taxes.
Do not reduce your deduction by either of the following items.
- Any state or local income tax refund (or credit) you expect to receive for 2008.
- Any refund of (or credit for) prior-year state and local income taxes you actually received in 2008.
However, part or all of this refund (or credit) may be taxable. See Refund (or credit) of state or local income taxes
If you and your spouse file separate state, local, and federal income tax returns, you each can deduct on your federal return only the amount of your own state and local income tax that you paid during the tax year. taxmap/pub17/p17-117.htm#en_us_publink100033963
If you and your spouse file joint state and local returns and separate federal returns, each of you can deduct on your separate federal return a part of the total state and local income taxes paid during the tax year. You can deduct only the amount of the total taxes that is proportionate to your gross income compared to the combined gross income of you and your spouse. However, you cannot deduct more than the amount you actually paid during the year. You can avoid this calculation if you and your spouse are jointly and individually liable for the full amount of the state and local income taxes. If so, you and your spouse can deduct on your separate federal returns the amount you each actually paid. taxmap/pub17/p17-117.htm#en_us_publink100033964
If you file a joint federal return, you can deduct the total of the state and local income taxes both of you paid. taxmap/pub17/p17-117.htm#en_us_publink100033965
As an employee, you can deduct mandatory contributions to state benefit funds withheld from your wages that provide protection against loss of wages. For example, certain states require employees to make contributions to state funds providing disability or unemployment insurance benefits. Mandatory payments made to the following state benefit funds are deductible as state income taxes on Schedule A (Form 1040), line 5a.
- Alaska Unemployment Compensation Fund.
- California Nonoccupational Disability Benefit Fund.
- New Jersey Nonoccupational Disability Benefit Fund.
- New Jersey Unemployment Compensation Fund.
- New York Nonoccupational Disability Benefit Fund.
- Pennsylvania Unemployment Compensation Fund.
- Rhode Island Temporary Disability Benefit Fund.
- Washington State Supplemental Workmen's Compensation Fund.
Employee contributions to private or voluntary disability plans are not deductible.
If you receive a refund of (or credit for) state or local income taxes in a year after the year in which you paid them, you may have to include the refund in income on Form 1040, line 10, in the year you receive it. This includes refunds resulting from taxes that were overwithheld, applied from a prior year return, not figured correctly, or figured again because of an amended return. If you did not itemize your deductions in the previous year, do not include the refund in income. If you deducted the taxes in the previous year, include all or part of the refund on Form 1040, line 10, in the year you receive the refund. For a discussion of how much to include, see Recoveries
in chapter 12.
Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U.S. possession. However, you cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U.S. tax under the foreign earned income exclusion or the foreign housing exclusion. For information on these exclusions, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. For information on the foreign tax credit, see Publication 514.