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If the city or town where you live imposes an income tax, your employer may need to withhold amounts from your wages to cover these local taxes. Your total annual payments will be reported on your W-2 in box 19 – which is appropriately titled “local income taxes.” Taxpayers are permitted to deduct local income tax payments if they choose to itemize.
Choosing to Itemize Taxes
Making the decision to itemize so that you can deduct local income taxes may not always save you the most in tax. Since you can choose between itemizing and claiming the standard deduction for your filing status, you might as well choose the one that gives you the biggest deduction -- even if it means not deducting your local income taxes this year. The filing status you’re eligible to use will determine the amount of your standard deduction. Standard deductions are always larger for certain filing statuses than they are for others. For example, a head of household filer is entitled to a bigger deduction than single filers are.
Evaluating Your Expenses
If the combined total of your state and local income tax payments is more than the standard deduction, itemizing is the obvious choice, regardless of whether you have other expenses to deduct or not. However, if those tax payments aren't enough, you can gauge whether you've incurred a sufficient amount of additional expenses to report on Schedule A that will make itemizing worth it. Some of the additional expenses you can deduct include local real estate tax payments, personal property taxes, mortgage interest, charitable donations, certain medical and dental costs, and unreimbursed employment expenses.
Prior Year Tax Payments
You can also deduct the other local income tax payments you make during the year that aren't reflected on your W-2 form. One of the principal requirements for taking the deduction is actually making a tax payment -- not just incurring the liability to pay it in the future. It also doesn't matter which tax year the payment relates to. For example, if your local income tax withholding was insufficient to satisfy your entire tax bill for the 2011 tax year and you paid it off when you filed your 2011 state or local income tax return in April of 2012 -- that payment is deductible on your 2012 federal tax return in addition to the amounts withheld from your wages during the year.
How To Report
If itemizing is beneficial, you need to prepare your tax return on the full-length Form 1040: Schedule A cannot be attached to the 1040A or 1040EZ forms. When you prepare Schedule A, you combine the state and local income tax amounts reported in boxes 17 and 19 of your W-2, as well as any other tax payments you made for a prior tax year, in the “Taxes You Paid” section of Schedule A.
- Internal Revenue Service: Form W-2
- Internal Revenue Service: Publication 501 - Exemptions, Standard Deduction, and Filing Information
- Internal Revenue Service: Instructions to Form 1040 (Schedule A)
- The Seattle Times: Senate Committee Agrees to Revive Sales-tax Deduction for Washington Residents
- Internal Revenue Service: Form 1040 (Schedule A)