The Internal Revenue Service tax code allows individuals to claim a tax deduction for the payment of certain taxes at the state and local level. These deductions do not extend to income tax payments due to the federal government for either prior or current year returns.
Deductions for taxes paid are reported on IRS form Schedule A, Itemized Deductions. Schedule A instructions specifically state that federal income taxes are not deductible. This also extends beyond income taxes to Social Security tax, Medicare tax, federal unemployment taxes and railroad retirement taxes. If your employer withholdings or estimated tax payments fail to cover the taxes owed, you must pay the difference or set up alternative payment arrangements with the IRS when you file your return. Because the payments you make cover a federal tax liability, you cannot deduct them at any time, even if it takes you several years to pay the full amount due.
Interest and Penalties
The IRS allows taxpayers who meet certain criteria to set up a payment plan to pay taxes due over an extended period of time, such as five years. These payment plans charge penalties and interest on the tax due until the amount is paid in full. Tax penalties and interest are not deductible since they are attached to a federal income tax burden.
Allowed Tax Deductions
If itemizing nets you a larger deduction than the standard deduction, you can lower your tax burden by claiming certain taxes. Both state and local income taxes may be deducted as well as state and local sales tax. This includes state sales tax paid on the purchase of a motor vehicle. Property owners itemizing on Schedule A may also deduct property taxes. Keep all records that specify the taxes you paid during the year when you itemize.
Avoiding Future Penalties
While there is no way to deduct federal tax penalties, careful financial planning can help you avoid the need to pay penalties for underpayment of taxes in the future. If you are an employee, update the information on the W-4 filed with your employer to request that more taxes be withheld from each paycheck. If you are self-employed, estimate your tax payments and send in quarterly payments to the IRS. Even if your tax liability ends up being higher than the funds you already paid the IRS, the amount owed should be manageable.
Ashley Mott has 12 years of small business management experience and a BSBA in accounting from Columbia. She is a full-time government and public safety reporter for Gannett.