Can I deduct income tax?

If you are itemizing your deductions, rather than taking the standard deduction, you can deduct your state, local and foreign income tax payments. Specifically, you can deduct any state, local or foreign income tax which was: (i) paid by you during the tax year; (ii) withheld from your paycheck during tax year (which will appear on your W-2 form); or (iii) which you made an estimated payment for during the tax year (as long as you had a reasonable basis for making the estimated payment).

You can also deduct mandatory contributions, taken out of your paycheck, to state unemployment or disability funds (this applies to employees in California, New Jersey, New York, Rhode Island and West Virginia). However, you cannot deduct contributions to voluntary plans.

There are two other things of note here. First, this deduction does not apply to federal income tax payments. So you cannot deduct any federal payments you made during the tax year (although they may be deductible on your state income tax returns). Second, for the 2005 and 2006 tax years only, you can elect to deduct state and local general sales tax instead of state and local income tax (unless Congress extends the law creating this option). But you can only select one or the other, not both.