State and local income taxes are deductible, but taxes on income that is exempt from U.S. federal income tax are not deductible.
If you choose to deduct state and local income taxes, rather than sales taxes, you can include:
State and local income taxes withheld from your pay during the year. The tax withheld from your pay is reported on your Form W-2. If you have other types of income, you may also have state and local income tax withholding reported on Forms W-2G, 1099-G, 1099-R, and 1099-MISC
State and local income taxes paid for a prior year, such as taxes you paid this year when you filed your state or local income tax return for last year. If you had to pay any penalties or interest, you can deduct only the part of your payment that is for taxes.
State and local estimated tax payments made during the current year, including any part of a prior year refund that you chose to have credited to your current year's state or local income taxes.
In California, New Jersey, or New York, you can deduct mandatory payments to the Nonoccupational Disability Benefit Fund; in Rhode Island you can deduct payments to the Temporary Disability Benefit Fund; in Washington, payments to the State Supplemental Workmen’s Compensation Fund; and in West Virginia, payments to the Unemployment Compensation Fund.
Refunds or Credits
You should not reduce your deduction by any state or local income tax refund or credit you expect to receive. And if you receive a refund of, or credit for, prior year state and local income taxes, you should not reduce your current year deduction. Instead of reducing your deduction, you may have to report the refund or credit as a recovery on Form 1040, on the line for “Taxable refunds, credits, or offsets of state and local income taxes”, if you deducted the tax in the prior year. If you did not itemize deductions in the prior year, you do not have to report the refund in your income.