If you itemize your deductions on Schedule A in pursuit of the prized tax cut, local and state tax deductions could prove to be a jackpot. State taxes that can be claimed as federal tax deductions include state sales taxes and local and state income taxes. However, you cannot deduct both types. Figure out for which type of state tax you paid the most—sales tax or state and local income tax—and deduct the higher of the two. This option applies only to 2004 and 2005 tax years as part of the American Jobs Creation Act of 2004.