Claiming the state income tax deduction

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Dear Tax Talk,
My question is about the state income tax deduction. Do you only claim the additional amount you had to write a check for at tax time? For example, I have $50 withheld from my paycheck each month, for a total of $600. The total tax is $1,000. Do I claim the $400 I have to write a check for or the total $1,000?
— Jim

Dear Jim,
A taxpayer can choose between claiming state and local income taxes or sales taxes when completing Schedule A for itemized deductions. In both cases, it is the amount of tax paid during the tax year.

In the case of sales tax, there are standard tables depending on your local tax rate, income level and family size. The IRS provides an interactive sales tax calculator on its Web site for purposes of computing a standard sales tax deduction.

In addition to the standard tables, you can deduct the sales tax on certain large-ticket items, such as the purchase or lease of a car, boat, motorcycle, etc. As an alternative to the standard tables, you can use actual sales tax that you gather from all your receipts for the tax year.

If you believe your state and local income taxes are higher than sales tax, you can claim them as a deduction instead. The deduction is based on the taxes paid during the tax year. This means the actual taxes paid or withheld from Jan. 1 through Dec. 31.

In your case, this would be the $600 withheld plus any additional state income taxes that you paid during 2008, namely the tax due, if any, with your 2007 return when you filed it April 15, 2008. Hence, the $400 you owe for your 2008 return, which you will pay when due April 15, 2009, would be deductible on your 2009 federal income tax return, due in 2010.

The ability to choose whether to deduct income or sales tax allows you to plan for tax purposes. For example, you may want to consolidate all your large purchases (car, boat and home improvements) in one year to maximize your sales tax deduction. In that year, you would want to minimize your state income taxes as much as you can to accumulate them for the subsequent tax year. The sales tax deduction is set to expire after 2009, but it has been repeatedly extended since 2004.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.