Where you live can affect the amount of federal income taxes you pay. This is because you may be able to write-off a variety of state-level taxes on your federal income tax return and reduce the amount of your federal tax bill.

State income taxes

If you pay state and local income taxes, you can deduct them as long as you itemize your deductions. you cannot take any write-off if you claim the standard deduction. State and local income taxes include amounts you pay through wage withholding, state estimated taxes, and direct payments to the state (e.g., an amount owed for a previous tax year).

Caution: these taxes are not deductible for purposes of the alternative minimum tax (AMT). if you are subject to the AMT, you lose the benefit of a write-off for these taxes.

Sales taxes
If you itemize but don’t deduct state and local income taxes, you can deduct state and local sales taxes. The amount of the deduction is based on an IRS table that factors in your household size and income. you can add to this amount the tax on certain large purchases. This deduction applies only for 2009 unless Congress extends it for 2010.

Special rule for certain new car purchases

If you bought a new vehicle on or after February 17, 2009, and before January 1, 2010, you can deduct the state and local sales and excise taxes on the vehicle in one of three ways:

• If you don’t itemize deductions, the tax on a purchase price up to $49,500 is an additional standard deduction amount as long as your adjusted gross income is below a threshold.
• If you itemize your state and local income taxes, you can also deduct the sales tax allowed as if you were claiming the standard deduction (there is a new line for this separate write-off on Schedule a of the 2009 Form 1040).
• If you itemize your state and local sales taxes for 2009, you can add the vehicle-related taxes to the amount of sales taxes you deduct based on IRS tables.

Note: The same AMT restriction applies to any state or local sales taxes claimed as an itemized deduction (but not taxes on certain vehicle purchases claimed as part of the additional standard deduction amount or as a separate itemized deduction).

Property taxes
If you own a home or other real property, taxes on the residence are fully deductible. Where you claim the deduction depends whether you itemize your deductions and the reason why you own the property:

• Principal residence. you can deduct all of the property taxes as an itemized deduction. if you don’t itemize, you can add to your standard deduction in 2009 and 2010 up to $500 if single or $1,000 if married filing jointly.
• Vacation home. you can deduct all of the property taxes, but only if you itemize your deductions.
• Rental property. Real estate taxes are reported on Schedule E.
• Business property. Real estate taxes on property owned by your business are deducted on the appropriate business return.

Note: if you are subject to the AMT, property taxes on personal-use property (your principal residence and vacation home(s)) is not deductible for AMT purposes.

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