Where are State and Local Taxes Deducted?


State and local income taxes are deductible as itemized expenses on your tax return in the year that they are paid. The tax may be paid either through withholding on a paycheck or through estimated tax payments made each quarter of the year or through an over payment from a prior year. Careful how you shift your payments, if you are planning with strategy for maximizing your deduction in a particular year, though.

The IRS may disallow your deductions for large estimated state income tax payments made solely to increase itemized deductions. You can google Revenue Ruling 82-208 if you are interested in reading more about it.

Any prepayment you make should be calculated accurately and supported by the expectation for a particular tax liability in that year for your state tax return. Always keep in mind that if you are in arrears on taxes and then you pay your balance in a lump sum, of course you deduct the taxes you paid, but you cannot deduct any penalties and interest on that liability. Fines and penalties are generally not deductible at all. They are considered personal expenses.

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