States That Allow You to Deduct Federal Income Taxes
Deducting Federal Income Taxes From Your State Taxes
Everybody loves tax deductions. They pare down your income so you'll pay taxes on less, and that's always a good thing. Available deductions vary between the state and federal level, however, and sometimes the rules can get confusing.
For example, 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 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, too, right?
Unfortunately, that's not the case. Of the 41 states that impose a tax on earned income, only six allow taxpayers to deduct their federal income taxes.
States That Allow Taxpayers to Deduct Their Federal Income Taxes
- Alabama allows a deduction for your total federal tax liability from your federal return, less any federal tax credits you claimed. So if you owe the IRS $4,000 and you claimed one tax credit in the amount of $1,000 on your federal return, you can claim a $3,000 deduction on your state return.
- 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, it includes checks you wrote, debits from your bank account, deferred refunds, and paycheck withholdings. So the deduction is equal to 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 with your 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.
- 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. Your deduction would be equal to line 55 on your federal Form 1040.
- 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, as well as the amount of certain refundable credits you received. The amount of the deduction is limited to $5,000 for single filers and $10,000 for married taxpayers who file jointly.
- 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 during the year. The amount of the deduction is limited to $5,000 for single filers and $10,000 for married filing jointly, and you must itemize on your state tax return to claim it.
- Oregon allows a deduction for your total federal tax liability from your federal return after adjusting for certain federal tax credits. The amount of the deduction is limited to $5,950 and it's phased out and eventually eliminated for higher earners. In other words, if you're a single taxpayer and you earn more than $125,000, your deduction will be less than $5,950.
Things to Consider
Keep in mind that in states where the deduction amount is equal to federal taxes actually paid in cash, you will have to adjust for any federal tax refunds you received during the year.
For states that use your tax liability from your federal return, adjustments to the deduction may be necessary if you later go back and amend your federal tax 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, and 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.