You can deduct state and local income taxes you paid. However, you must claim the deduction in the year you paid the taxes.

You'll increase your deduction for the current year if both of these are true:

• You make estimated state tax payments.
• You make the last payment in December instead of January.

If you didn't do this last year, deduct it in the current year -- the year you paid it. If you owed money to a state or locality last year, you probably paid the bill in the current year. If you did, include the amount in your current-year deduction.

State and Local Sales Taxes

You can choose to deduct your state and local sales taxes instead of state and local income taxes. This could benefit you if your sales taxes are more than your income taxes.

To claim the state and local sales tax deduction, you don't need to save receipts unless you made a qualifying large purchase, like a car. The IRS provides tables of standard amounts you can deduct. The standard amounts are based on:

• Your income
• State where you live
• Your family size

Most people who live in a state with a state income tax probably paid more income tax than sales tax. However, in those states, people who live on federal or state pensions and Social Security income might benefit from this deduction. This might be the case since those pensions and Social Security aren't usually taxable state income.