Can I Deduct State Tax Payments Made From Prior Years in My Taxes?

Prior Year's Tax Paid this Year

If you paid a prior year's state taxes this year, you can deduct the expense on your federal tax return. If you did not withhold enough to pay all of the previous year's state taxes and you paid the remaining portion this year, you can deduct the remaining unclaimed portion this year on your annual return. As long as you paid the state taxes this year, you can deduct them on this year's tax return. It is advisable to keep all W-2 statements, cancelled checks, bank statements and overdue notices in case you are audited by the IRS.

The IRS does not allow you to deduct a prior year's state tax payments that you paid in a past year on your current federal return. For example, if you did not deduct state taxes that you paid in 2010 on your 2010 tax return, you cannot simply add those to your 2011 tax return. Only state taxes you actually paid in 2011 can be included on your 2011 return. If you or your accountant discovers unclaimed state taxes paid in a previous year, you can file an amended return with the IRS. Do not claim the state tax on this year's return, or the IRS will penalize you for deducting too much from your taxable income.

According to IRS rules, you can file an amended tax return within three years of the date you filed the original return or within two years of the date on which you paid any tax on the return, whichever is later. Once you discover unclaimed state taxes paid in a previous year, it is advisable to file tax Form 1040X with the IRS as soon as possible.

State tax payments are reported as an itemized deduction on Schedule A of tax Form 1040. All state taxes paid this year, regardless of the year they were assessed, can be included as part of your itemized deductions. The IRS does not require you to differentiate state taxes assessed in a previous year from those assessed this year, the total amount can be deducted on Schedule A of tax Form 1040.