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Legitimate ways to reduce your tax bill

Taxes you paid 
If you live in a state that collects state or local income taxes, the amount you pay can be deducted against your taxable federal income. This includes taxes withheld from your paycheck (and shown on your W-2), as well as payments made directly to your state or local tax collector (such as estimated taxes).

Mandatory contributions you made to the California, New Jersey or New York Nonoccupational Disability Benefit Fund, Rhode Island Temporary Disability Benefit Fund or Washington State Supplemental Workmen's Compensation Fund also can be deducted here.

Taxpayers who live in a state that does not collect income taxes, but does levy sales tax -- they are Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming -- also get a chance to deduct those payments on Schedule A. Local sales taxes count, too, which could benefit residents of Alaska, where there is no statewide income or sales tax, but where some municipalities do collect sales taxes.

If you pay both state income and sales taxes, you must choose which amount to deduct. For some taxpayers, for example, those in Illinois which has a relatively low 3 percent flat income tax rate, the sales tax deduction might be more beneficial.

Other taxes apply, too. Property owners can deduct real estate taxes they paid during the tax year. If they are paid by your mortgage company with escrowed funds collected as part of your mortgage payments, remember that you can only deduct the actual amount of taxes paid in the tax year, not the full amount of escrow payments you sent in to your lender.

Some states, counties and cities also assess personal property taxes, most commonly on vehicles. Car taxes, as well as other personal property tax bills, can be claimed on Schedule A.

You also are allowed to deduct what the IRS calls "any deductible tax" not specifically listed on the form. A common entry here is a deduction for foreign taxes paid in connection with investments funds.

Interest you paid 
Interest paid on personal loans won't help you at tax time, but for most homeowners, interest on home loans -- for both a primary residence and a second home -- is deductible.

Home mortgage interest is usually reported on the Form 1098 you get from your lender by the end of January. If you bought your home during the tax year and paid points for the loan, those points also will be listed on the 1098 and that amount can be deducted on Schedule A. If the points aren't noted on your 1098 form, double check your settlement statement.

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