State Tax Deductions: Make the Most of Your Options

Tax season is a tough time for all Americans, but those who pay state taxes as well as federal taxes have an added burden. What many don't know, though, is that they might be able to use state-tax payments as a deduction on their federal returns.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at state tax deductions. Dan notes that you can itemize certain state tax payments, making them available to anyone who doesn't take the standard deduction. Unfortunately, you have to choose between a sales tax deduction and an income tax deduction, with those who have to pay both only getting to take one. Dan runs through the rules for claiming these tax deductions, pointing out that for income taxes, you can only deduct what you actually pay, but for the sales-tax deduction, you can use special IRS tables rather than having to calculate every single purchase you made. For high-income taxpayers, though, the Alternative Minimum Tax can take away your state tax deduction.