By itemizing deductions, you can subtract many nonfederal taxes you pay from your federal income. The less income you have, the less you owe Uncle Sam.
State bills lower federal taxes
For folks who itemize, allowable deductions include state and local income taxes or, for some filers, sales taxes paid throughout the year, along with real estate taxes, personal property taxes and intangible taxes on investments.
If you paid estimated taxes to your state revenue department, don't forget to add those amounts to the state income taxes that were withheld from your paychecks throughout the year.
And taxpayers in California, New Jersey, New York, Rhode Island and Washington may deduct mandatory payments made to those states' disability and compensation funds. Employee contributions to private or voluntary disability programs are not deductible.
Schedule A even offers itemizing taxpayers a catchall line (line 8) for "other" taxes. Here you can deduct occupational taxes or any foreign income taxes.
Foreign taxes are not that unusual, especially for investors whose holdings include mutual funds that invest -- and pay dividend taxes -- overseas. If that's the case, you'll find the foreign tax amount in box 6 of the Form 1099-DIV that your fund manager has sent you. This amount may be worth more tax savings to you, however, as a credit on line 47 of your Form 1040.
Don't go overboard
But don't get carried away in deducting taxes. There are some payments that Uncle Sam won't allow you to subtract from your federal income, including:
- Federal excise taxes.
- Social Security and Medicare, or FICA, taxes.
- Federal unemployment, or FUTA, and railroad retirement, or RRTA, taxes.
- Customs duties.
- Federal estate and gift taxes.
- State gasoline taxes.
- Car registration and inspection fees.
- Transfer, or stamp, taxes on the sale of property.
- License fees, such as driver's, marriage or pet tags.
- Assessments for sidewalks or other property improvements.
- Parking and traffic tickets or other fines.
- And if you paid any tax penalties or interest, sorry. These charges aren't deductible either.