Schedule A or Standard Deduction

Maybe I don't understand your question, but I would think that you would use whichever gave you the best tax result (greater amount of deductions). Should be a no-brainer.

You can only claim the actual amount of state tax or withholding that you paid in 2005, regardless of your state tax liability.

If I understand you correctly - neither - since all the payments FOR 2005 were paid in 2006. Schedule A is purely calendar basis. Not accrual. You deduct on Schedule A only those state taxes PAID IN 2005, no matter what year they were for. We run into problems with clients who pay their 4 estimates according to the date on the vouchers, and don't understand why we use what they paid to California in January 2005 FOR THE FOURTH PAYMENT FOR 2004, and don't use the 4th payment for 2005 made in January 2006. Withholding, on the other hand, is always paid within the calendar year. Nan, EA in LA

Neither. California income taxes paid in 2006 are deducted on your federal 2006 return, not your 2005. When you finally file your 2005 federal return you can deduct state income taxes paid in 2005 if your 2005 itemized deductions exceed your standard deduction.

Neither. You don't put any of that California tax on your federal return because you are filing your federal return for 2005, but you paid the California tax in 2006. You will be able to deduct it on Schedule A of your federal return for 2006, which you will file in 2007. It doesn't matter that the California tax was FOR 2005. You take the deduction in the year that you PAID it, not the year it is FOR. The way you decide whether to use the standard deduction or itemized deductions is to see which is higher. If the total itemized deductions on the last line of Schedule A are higher than your standard deduction, then take the itemized deductions. If the itemized deductions are less than the standard deduction, then take the standard deduction. (There are a few unusual situations where the rules require that you itemize, or require that you take the standard deduction. One such situation occurs if your filing status is married filing separately.) Bob Sandler

For most people, it's best to use whichever deduction is larger. There was a thread sometime last year discussing some exceptional cases.

When you're filling in your federal tax return for 2005, you deduct the amount of state tax you paid IN 2005, not the amount you paid FOR 2005. That would be the amount you had withheld last year plus the amount you sent in last year with your 2004 state tax return. If you find that you have to pay more now, it will be deducted on your 2006 return, which you'll fill out next year.

-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA

One preparer told me that she tells all her clients to pay the

Bob Sandler

As to the accounting method used on schedule A, I must disagree. It is whatever method the taxpayer has chosen within the meaning of IRC 446. Although 446(d) allows a taxpayer to have a differing method for each trade or business from each other and/or his MAIN METHOD, there is absolutely nothing in the IRC itself that mandates itemized deductions as a whole to be cash basis only. I shall grant that there are certain itemized deductions that seem as if they are "cash basis" (e.g. contributions - requiring a completed gift), but there are others that have no such requirement (e.g. taxes, especially real estate property tax).

True only because all your individual clients are cash basis for their non-business affairs (as is 99% of the population, but there are a few who are not).