Income Taxes

Aside from your real estate taxes, the other big-ticket item among deductible taxes are state and local income taxes, in areas that have them. You can deduct all state and local income taxes that have been withheld from your paycheck during 2002 as shown on Form W-2, from your pension on Form 1099-R, from investment income on Forms 1099-INT or 1099-DIV, or from other payments on Form 1099-MISC.

Deduct tax payments in the year that you make them. If it later turns out that you get a refund, don't subtract the refund from your otherwise deductible taxes - include it as income on Line 10 of Form 1040, but only if you itemized deductions in the year to which the refund pertained.

On the other hand, if your withheld state and local income taxes were not enough to cover your tax bill for last year and you had to send in a check along with your tax return last April 15, don't forget to include the amount as taxes paid in 2002 on Line 5 of Schedule A.

State disability fund taxes. If you, as an employee, had amounts withheld from your paycheck to pay mandatory taxes to one of the following state benefit funds, you can deduct the amounts: California, New Jersey, or New York Nonoccupational Disability Benefit Fund; Rhode Island Temporary Disability Benefit Fund; Washington State Supplemental Workmen's Compensation Fund; West Virginia Unemployment Compensation Trust Fund; and Alabama state unemployment fund.

Foreign income taxes. Generally, you have the choice between deducting foreign taxes on Schedule A, or claiming a tax credit for them on Form 1116. Usually, the credit will do you the most good.