State and local taxes are those imposed by the 50 states or any of their political subdivisions (such as a county or city) and by the District of Columbia. You may deduct state, local, or foreign income taxes withheld from your salary, as well as estimated payments made under a pay-as-you-go-plan of a state or local government. You also may deduct payments made on taxes due but not paid in an earlier year in the year they were actually withheld or paid. In sum, to be deductible the tax must be paid during your tax year. You may deduct only those taxes paid during the calendar year for which you file a return.
If you receive a refund of these taxes in a later year, you must include the return as income in the year you receive it. This would include refunds resulting from taxes that were over withheld, not figured correctly, or figured again as a result of an amended return. If you did not itemize your deductions in a previous year, you do not have to include the refunds. Furthermore, the amount included in your income is limited to the tax benefit you received in the earlier years. For example, assume you deducted $500 in taxes and received a refund of $100; your total itemized deductions exceeded your standard deduction amount by only $50. The only tax benefit you received, therefore, was the $50 excess itemized deduction. On this basis you need only include $50 of the refund in your income for the subsequent year.
You also may deduct amounts required to be withheld from your wages for certain state disability benefit funds that provide against loss of wages. These payments to the disability fund are deductible as state income taxes. Furthermore, employee contributions to a state fund that provides indemnity coverage for the loss of wages caused by unemployment resulting from business contingencies are also deductible as taxes. Employee contributions to private disability plans, however, are not deductible.
Foreign taxes include those taxes imposed by a foreign country, a U.S. possession, or any of their political subdivisions. Foreign income taxes that you pay may either be deducted as an itemized deduction or claimed as a credit against your U.S. tax.
-Extracted From the book “How to pay zero taxes 2010″ by Jeff A.Schnepper