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BE CAREFUL WITH YOUR DEDUCTIONS FOR TAXES PAID

March 25, 2007

One of the most common errors we see on self-prepared income tax returns is miscomputing the deduction for state and local taxes paid. Iowa allows taxpayer to deduct federal taxes paid in computing state income taxes, and that deduction is also frequently botched.

The most common mistake involves missing a fourth quarter payment or a prior year balance due. For example, a fourth quarter state estimated tax payment made for 2005 in January 2006 should be deducted on the 2006 federal return, but it is often forgotten.

We use a worksheet to make sure we don't miss these deductions. It looks something like this:

Click worksheet to enlarge.

You need to be careful, especially with the refund part of the worksheet. Often refunds aren't taxable, as when the refunded taxes were paid in a year when alternative minimum tax was paid. You should carefully work through the refund worksheets in the IRS instructions before you put a taxable refund number on your return.

Still, don't shortcut this worksheet, or you might shortcut some of your rightful deductions.

Link: The complete collection of our 2007 Filing Season Tips

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