States That Allow You to Deduct Federal Income Taxes

Deducting Federal Income Taxes From Your State Taxes

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You can deduct your state taxes on your federal income tax return, and federal law requires that states must allow you to claim a credit for or to deduct income taxes that you've paid to other states as well. So it only stands to reason that you should be able to deduct your federal taxes on your state tax return. Unfortunately, that's not always the case.

Only six of the 41 states that impose a tax on earned income allow taxpayers to claim a deduction for their federal income taxes as of 2020: Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon. And some of these states are more generous than others.

Alabama's Deduction

Alabama allows a deduction for your total federal tax liability from your federal return, less any federal tax credits that you've claimed. For example, you could claim a $3,000 deduction on your state return if you owe the IRS $4,000 and you claimed one federal tax credit in the amount of $1,000 on your federal return.

You can't claim the state's federal income tax deduction if you file Alabama's Simplified Short Form tax return (EZ) form.

Iowa's Deduction

Iowa allows for a deduction of all federal taxes actually paid in cash during the year. Don't take the term "cash" too literally. In tax terms, this includes checks you wrote, debits from your bank account, deferred refunds, and paycheck withholdings.

The deduction is equal to the federal taxes withheld from your paycheck during the year, plus any estimated payments you might have made during the year, plus any federal taxes you paid when you filed your federal tax return.

This means that you would be deducting taxes paid with your prior year federal return since that return would have been filed during the current calendar year. You must deduct the amount of any federal refund received.

Governor Kim Reynolds attempted to have this deduction repealed from the state's tax code back in 2018, but it didn't end up happening.

Louisiana's Deduction

Louisiana’s deduction for federal taxes is equal to your total federal income tax liability on your return after subtracting any non-refundable federal tax credits you claimed. You can add on federal disaster tax credits you might have received due to Hurricane Katrina and Hurricane Rita.

Keep tabs on any IRS relief offered if you live in Louisiana and were affected by Hurricane Laura in 2020.

Missouri's Deduction

Missouri allows a deduction for your federal income tax liability resulting from your federal tax return, but any alternative minimum tax (AMT) you're liable for must be subtracted. You must also subtract the amount of certain refundable credits you received.

The deduction is limited to $5,000 for single filers and $10,000 for married taxpayers who file jointly. This is the maximum deduction you can claim. The amount of your deduction is a percentage of your Missouri adjusted gross income (AGI). Beginning with the 2019 tax year—the tax return you would file in 2020—the deduction is eliminated at an AGI of $125,001 or more per individual.

Montana's Deduction

Montana allows a deduction of all federal taxes actually paid in cash during the year. The deduction is equal to federal taxes withheld from your paycheck during the year plus any estimated payments you made during the year, plus any federal taxes paid with your prior year’s tax return.

You cannot deduct any self-employment taxes you might have paid because these represent FICA taxes—Social Security and Medicare taxes—not income taxes.

The amount of the deduction is limited to $5,000 for single filers and $10,000 for married taxpayers who file jointly, and you must itemize on your state tax return in order to claim it. 

Oregon's Deduction

Oregon allows a deduction for your total federal tax liability on your federal return after adjusting for certain federal tax credits. The amount of the deduction is limited to $6,800 as of the 2019 tax year—the return you'll file in 2020—and this drops to $3,400 if you're married and file a separate tax return.

The deduction is also phased out and eventually eliminated for higher earners. Your deduction will be $5,450 or less if you're a single taxpayer and your AGI was more than $125,000 in 2019. You can't claim the deduction at all if your income was $145,000 or more.

The maximum deduction for married taxpayers filing jointly is $6,800 on joint incomes of $250,000 or more, and the deduction phases out to zero if you earned $290,000 or more in 2019.

Things to Consider

Keep in mind that you'll have to adjust for any federal tax refunds you received during the year in states where the deduction amount is equal to federal taxes actually paid in cash. Adjustments to the deduction might be necessary if you later go back and amend your federal tax return in states that use your tax liability from your federal return.

Filing Your State Income Tax Return

Preparing and filing your return electronically is the preferred method for tax compliance. You'll have a more accurate return if you use a software program and you'll get your refund faster—if you're entitled to one—if you e-file and choose direct deposit.

Many states have lists of free software programs you can use on their websites. Purchased tax software programs like TurboTax usually include state tax return preparation for most, but not all, states, although you might have to pay extra to file a state return. Check the list of available states and the software's terms before you purchase it. 

NOTE: Tax laws change periodically. You should always consult with a local tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.

Article Sources

  1. Alabama Department of Revenue. "Individual Income Tax FAQ." Accessed Oct. 7, 2020.

  2. Casetext Inc. "Iowa Admin. Code r. 701-41.3." Accessed Oct. 7, 2020.

  3. Louisiana Department of Revenue. "What's New for Louisiana 2019 Individual Income Tax?" Page 12. Accessed Oct. 7, 2020.

  4. Missouri Department of Revenue. "Individual Income Tax Year Changes." Accessed Oct. 7, 2020.

  5. Montana Department of Revenue. "Clarifications Regarding the Deductibility of Federal Income Taxes." Accessed Oct. 7, 2020.

  6. Oregon Department of Revenue. "Publication OR-17 Individual Income Tax Guide." Pages 62-64. Accessed Oct. 7, 2020.