Fiscal Tax Blog

It sometimes seems unfair that both the Federal and State governments can tax us on our income. The IRS has tried, in part, to compensate for this. If you are itemizing your deductions (instead of taking the standard deduction, which is the default rate that the government deducts from your income), you may choose to deduct the amount of money that you paid on your state taxes during the year before. So, if you are filing your 2008 taxes, you may choose to deduct the amount you paid on your 2007 taxes. Because this is an option, if you are headed to someone new to do your taxes, be sure to bring your tax forms from the prior year.

Most people, in states that have a state income tax, will find that this is the best option. However, there are exceptions. If this is the only thing you have to itemize on your taxes, then unless you paid a very large amount of state taxes, you will probably find that the standard deduction will allow you to owe less money. The other exception is when you owe little or no state income tax, or when you have made a lot of large purchases during the year. The IRS gives you a choice between two taxes to deduct, and for people in this second category, sales tax may be a better choice. If you have lots of receipts for big-ticket items, it is worthwhile to bring in receipts and do a comparison to give you the largest deduction possible. If you don't have a large state tax bill, but don't have many receipts, the IRS offers a default amount based on your income and where you live that you may deduct instead.

Can't take advantage of this tax break?

Check out our list of 40 Tax Breaks that you could use to get your largest tax refund ever in 2009.

Have a question about this tax break?

Leave a comment below and we'll get you an answer that could save you money on your tax return this year.