OK, so here is the deal. We had a renter rent out part of our basement for $700/month in Waldorf, MD. We have to claim that income we made. I prelimarily did my taxes, and we owe something like $3100 in taxes. My wife and I both work (I'm and engineer and she's a Naval nurse).

Someone pointed out that we can claim our state taxes as deductions. Is this true? Because if so, then I paid almost $3900 in state taxes in Maryland. She doesn't pay state taxes because she is in the Navy and her state residence (according to the Navy) is Florida (no state income taxes there) even though we live together in Maryland.

Can we claim the $3900 in state taxes as deductions for my federal return? If so, that will more than offset the cost of the taxes for my federal return.

As a general rule local taxes can be deducted if you itemize your deductions, if you take the standard deduction you can not. You may also be able to deduct the expense of keepeing the basement habitable as a business expense and offset some of the rental income.

I'd suggest you spend a couple of bucks and consult a tax professional like a CPA.

Yeah I will definitely itemize my deductions. I think I will have my wife take this to the First Command tax professionals to try and figure this out. I never knew you could deduct state taxes before.

Is there any way I can do this for the 2004 tax year (I forgot to deduct the local taxes in 2004)?

You may be able to file an amended return for '04. Ask a pro or look it up in the instructions that come with the tax forms.

OK, so here is the deal. I redid my 2005 tax return, and it seems I went from paying about $3,500 in taxes to paying $274. Here's how:

I had a renter for all of 2005. I had to claim that income, but I was able to reduce that "taxable" income by about $5,500 by claiming utilities, maintenance problems, supplies, repairs, crap like that.

Also, I did not know that I can deduct my state taxes on my federal return. That reduced my taxable income by about $4000. Overall, I owe $1001 in 2005 taxes after everything is said and done. I was pissed that I couldn't deduct my TSP contributions or take the Retirements Savings Account Contribution (because me make well in excess of $50,000).

Then I thought, well, I might as well file an amended return for 2004. I owed $102 in taxes in 2004 (the year we bought our house). Well, after claiming the state taxes, we're getting back the $102 PLUS an additional $625!

I'm extremely happy about this. I get to keep our savings! WOOOOOT!

Nice, good job. It's amazing what a little diligence can do.