Are you wondering, “Can I deduct state income tax on federal return?” In that case, you need to learn what your options are.
The IRS allows for multiple 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 nine 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 also worth noting that the IRS does not allow you to claim both state income and sales or local taxes on the same return.
Read More: Form 1040: What You Need to Know
How to Deduct State Income Tax From Federal Return
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. So, the state income tax paid the previous year can only be attributed to that year. For instance, if you owed state taxes in 2020, but did not pay until 2021, then 2021 is the year that you must deduct these state income taxes on your federal return.
In this example, you would deduct taxes owed in 2020, but paid in 2021, on the tax return you file in 2022. 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.
And remember, the current tax guidelines limit your total deduction amount for property, local and state income, and sales taxes to $5,000 when married filing separately and $10,000 when filing a joint tax return.
Read More: Deducting State & Local Tax on Your Federal Taxes
Filing Options and Responsibilities
Once you’ve determined how much you can deduct, use Schedule A, Itemized Deductions and fill in the section labeled “Taxes you Paid.” Use Line 5a to include either your state or local income taxes or sales tax, but not both.
Line 5b is for state and local real estate deductions, while 5c is for state and local personal property taxes. Lastly, 5d enables you to add all the deductions to determine what you will claim in the end. If it is in excess of $5,000 for single filers or $10,000 for joint filers, you only get to claim the maximum set by law. Otherwise, you can claim your total deduction amount.
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.