The IRS allows for four types of non-business tax deductions, and state, local as well as foreign income tax deductions are among them. If you paid state income taxes, the IRS allows you to deduct state taxes from federal returns, given certain criteria are met. However, if you live in one of seven states where residents do not pay income tax, then you might be able to deduct state sales tax instead. Either way, in order to deduct these state taxes, you must itemize your deductions on IRS Form 1040, Schedule A. It’s worth noting that the IRS does not allow you to claim both state income and sales or local taxes on the same return.
You can only deduct taxes in the year that they were paid rather than the date they were due.
Itemizing and Claiming State Income Deductions
In order to write off your state income tax or estimated tax payments on your federal return, you must itemize your deductions. You cannot deduct state income taxes if you’re only taking standard deductions. Deductions for state income and local taxes that you have paid are subtracted from your adjusted gross income, or AGI. Any deductions you take decrease the amount of income on which you pay federal tax. Depending upon your tax bracket, this in turn lowers your tax obligation.
You must deduct these taxes in the year you actually paid them, and not when they were due. For instance, if you owed state taxes in 2016, but did not pay until 2017, then 2017 is the year that you must deduct these state income taxes on your federal return. In this example, you would deduct taxes owed in 2016, but paid in 2017, on the tax return you file in 2018. Determining how much income tax deductions available to you is simple; Form W-2 supplied by your employer will have all local and state income taxes that were withheld from your wages for the year. You then deduct these taxes on Schedule A, line 5a.
Deducting Sales Taxes
Taxpayers living in a state that taxes income are still able to claim state and local sales taxes; however, they cannot claim both. While it is usually most beneficial for those living in a state with income taxes to deduct those on their federal return, certain large purchases – such as cars or boats – may be a better deduction. It’s best to run both scenarios, and take the deductions that give you the most tax benefits.
If your state does not tax income, you have the option of deducting any state or local sales taxes you’ve paid instead. Deducting state and local sales taxes does require meticulous record-keeping because you must have a receipt or proof for every purchase. You also have to go through and total them all. In the event the IRS decides to take a closer look at your return, you want to have proof that these deductions are valid. In case you need some extra assistance, the IRS website has a state sales tax calculator as well as optional sales tax tables to help you determine how much to deduct. This can also be helpful if you have relocated and new state income tax laws apply to you.
Filing Options and Responsibilities
Once you’ve determined how much you can deduct, use Schedule A, Itemized Deductions, and enter this figure on line 5b.
- H & R Block: State and Local Income Tax
- NerdWallet: How to Deduct State Taxes on Your Federal Tax Return
- IRS: Topic No. 503 Deductible Taxes
- IRS. "Topic No. 503 Deductible Taxes." Accessed Oct. 22, 2020.
- IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2020." Accessed Oct. 22, 2020.
- IRS. "Publication 501 (2019): Dependents, Standard Deduction, and Filing Information." Accessed Oct. 22, 2020.
- IRS. "IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017." Accessed Oct. 22, 2020.
- IRS. "Sales Tax Deduction Calculator." Accessed Oct. 20, 2020.
- Tax Foundation. "How the State and Local Tax Deduction Interacts With the AMT and Pease Limitation." Accessed Oct. 22, 2020.
- IRS. "My Spouse and I Are Filing Separate Returns. How Do We Split Our Itemized Deductions?" Accessed Oct. 22, 2020.
- IRS. "2018 Instructions for Schedule A." Page 1. Accessed Oct. 22, 2020.
- IRS. "Publication 505 (2019) Tax Withholding and Estimated Tax - Community Property States." Accessed Oct. 22, 2020.
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.