Deduction - State Tax on Federal Schedule A
The taxes you pay to your State are deductible when you itemize on Schedule A, but you should be aware of the Sales Tax deduction as well.
State Tax on Schedule A
It makes sense that you would be able to deduct your State Income Tax from your Federal Tax liability. If you had to pay Federal Taxes on the income that went to pay State Taxes that would amount to double taxation on the same amount. So, as long as you are not claiming the standard deduction and itemizing your deductions on Schedule A, your State Tax paid is a valid deduction.
If you get a refund from your State Taxes, the amount of the refund will be considered taxable income for the next year. Once again, this is one of the more logical points to figuring deductions. Basically, a refund of State taxes is because you overpaid the tax and the State is simply returning the overpayment. Therefore this amount was not taxed by the State and will be taxed by the IRS.
A recent change in the law has allowed the option of claiming State and Local Sales Tax in lieu of claiming the State Income Tax. This is an either/or deal. You can claim one or the other, but not both. If you save every single sales receipt for the entire year, you can add up the total amount of Sales Tax actually paid and use that figure. Since most people do not save every receipt, there is a Schedule that gives you the figure you can use based on your income and exemptions.
This law has been a boon to those in States where there is no State Income Tax, but it can be helpful to those in States that do have the State Tax also. You need to calculate both amounts and determine which one is the highest. Even if you have only saved or recorded a portion of your Sales Tax receipts, you might want to add up what you have and see how you stand. The Schedule will most likely be far below what you would have actually spent.
State Income Tax is a deduction on Federal Schedule A and it is one that you should not overlook. If you choose the Sales Tax option, and do not forget to add on Local Sales Tax if that is applicable, you just indicate your choice with the letters "ST" on the schedule next to the deduction amount.