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State and local income taxes. You can deduct state and local income taxes.
   However, you cannot deduct state and local income taxes you pay on income that
   is exempt from federal income tax, unless the exempt income is interest income.
   For example, you cannot deduct the part of a state's income tax that is on a
   cost-of-living allowance that is exempt from federal income tax. 

   What to deduct. Deduct state and local income taxes withheld from your salary in
   the year they are withheld. For 1997, these taxes will be shown in boxes 18 and 21
   of your Form W-2. You may also have state or local income tax withheld on Form
   W-2G (box 14), Form 1099-MISC (box 11), or Form 1099-R (boxes 10 and
   13). Deduct payments made on taxes for an earlier year in the year you pay them. 

   Deduct estimated tax payments you made during the year under a pay-as-you-go
   plan of a state or local government. However, you must have a reasonable basis for
   making the estimated tax payments. Any estimated state or local tax payments you
   make that are not reasonably determined in good faith at the time of payment are
   not deductible. For example, you made an estimated state income tax payment.
   However, the estimate of your state tax liability shows that you will get a refund of
   the full amount of your estimated payment. You had no reasonable basis to believe
   you had any additional liability for state income taxes and you cannot deduct the
   estimated tax payment. 

   Deduct any part of a refund of prior-year state or local income taxes that you
   chose to have credited to your 1997 estimated state or local income taxes. 

   Do not reduce your deduction by either of the following: 

        Any state or local income tax refund (or credit) you expect to receive for
        1997, or 
        Any refund of (or credit for) prior year state and local income taxes you
        actually received in 1997. 

   Refund (or credit) of state or local income taxes. If you receive a refund of (or
   credit for) state or local income taxes in a year after the year in which you paid
   them, you may have to include the refund in income on line 10 of Form 1040, in the
   year you receive it. This includes refunds resulting from taxes that were
   overwithheld, applied from a prior year return, not figured correctly, or figured
   again because of an amended return. If you did not itemize your deductions in the
   previous year, you do not have to include the refund in income. If you did deduct
   the taxes in the previous year, include all or part of the refund on line 10, Form
   1040, in the year you receive the refund. For a discussion of how much to include,
   see Recoveries in chapter 13. 

   Separate returns. If you and your spouse file separate state, local, and federal
   income tax returns, you each can deduct on your federal return only the amount of
   your own state and local income tax. 

   If you file separate state and local returns and a joint federal return, you can deduct
   on your joint federal return the total of the state and local income taxes both of you
   paid. 

   If you and your spouse file joint state and local returns and separate federal returns,
   each of you can deduct on your separate federal return part of the state and local
   income taxes. You can deduct only the amount of the total taxes that is
   proportionate to your gross income compared to the combined gross income of
   you and your spouse. But you cannot deduct more than the amount you actually
   paid during the year. If you and your spouse are jointly and individually liable for
   the full amount of the state and local income taxes, you and your spouse can deduct
   on your separate federal returns the amount you each actually paid. 

   Table 24-1. Which Taxes Can You Deduct? 

   State benefit funds. As an employee, you can deduct mandatory contributions to
   state benefit funds that provide protection against loss of wages. Mandatory
   payments made to the following state benefit funds are deductible as state income
   taxes on line 5 of Schedule A (Form 1040). 

        California. 
        New Jersey. 
        New York Nonoccupational Disability Benefit Fund. 
        Rhode Island Temporary Disability Benefit Fund. 
        Washington State Supplemental Workmen's Compensation Fund.