When to Itemize

• You itemize your deductions when they exceed the standard deduction. The standard deduction depends on your filing status (single, head of household or married). Medical expenses exceeding 7.5 percent of your adjusted gross income (AGI), unreimbursed employee expenses exceeding 2 percent of your (AGI) and donations paid to charity are also itemized.
  
  

State and Local Income Taxes

• If you itemize your deductions, as of 2011 you can deduct state and local income taxes withheld from your wages. Mandatory payments made to some state funds, such as unemployment and workers' comp funds, are treated as state income taxes.
  
  

Real Estate Taxes

• State and local real estate taxes that are based on the real estate property's assessed value are deductible from your federal taxes. The local or state government must establish a single tax rate in its area, and the taxes must fund public projects. Sales taxes paid for home or building materials are deductible if your state does not levy state income taxes. You must itemize this deduction. Taxes on rental property used to produce income is a business expense.
  
  

Business and Occupational Taxes

• Occupational taxes are deductible if your city or state charges a flat rate to operate a business. If you are an employee, only the portion of occupational taxes exceeding two percent of your adjusted gross income is deductible. If you are self-employed, this deduction is not subject to the 2-percent AGI limit -- it is deductible as a business expense.
  
  If you are self-employed with employees, you can deduct your share of the Social Security and Medicare taxes on employee wages. You can also deduct unemployment taxes. You can deduct one-half of your self-employment tax from your Federal income tax. You can also deduct excise taxes and corporate franchise taxes.
  
  

Restrictions

• As an employee, you cannot deduct Social Security and Medicare taxes withheld from your wages. Estate, inheritance and gift taxes are not deductible. Since they are included in the product prices, sales and fuel taxes are not deductible. You cannot deduct your federal income taxes under any circumstances. State and local tax refunds are treated as income on your federal return.