Federal law requires that states allow you to claim a credit for, or deduct, income taxes that you've paid to other states. You might assume you can deduct your federal taxes as well. This isn't always the case, though.
Only six of the 42 states that impose a tax on income allow taxpayers to claim a deduction for their federal income taxes. These states are Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon. Some of them are more generous with this tax provision than others.
Alabama's Federal Income Tax Deduction
Alabama allows both residents and non-residents to claim a deduction for any federal income tax you pay. If you're a resident, you can deduct your full federal tax liability. If you're a non-resident, you can only claim the deduction for any taxes on the income you earned in Alabama.
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 Federal Income Tax Deduction
Iowa allows for a deduction of all federal taxes actually paid in cash during the year. In tax terms, that includes checks you wrote, debits from your bank account, deferred refunds, and paycheck withholdings.
The deduction is equal to the amount of the federal taxes withheld from your paycheck during the tax year, plus any estimated payments you might have made during the year and any federal taxes you paid when you filed your federal tax return.
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Governor Kim Reynolds attempted, unsuccessfully, to have this deduction repealed from the state's tax code back in 2018.
Louisiana's Federal Income Tax Deduction
If you're a Louisiana resident, you can take a federal income tax deduction on your 2021 tax return (filed in 2022). The 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.
Beginning in 2022, though, the federal income tax deduction was repealed by the Louisiana legislature. On your 2022 tax return (to be filed in 2023), you won't be able to deduct the value of federal income tax that you've paid.
Missouri's Federal Income Tax 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 you can take is the amount of federal tax you actually paid according to your federal Form 1040. You must file a federal tax return to find this amount, rather than using the amount of federal tax withheld by your employer on your W-2.
Montana's Federal Income Tax 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 and any federal taxes paid with your prior year’s tax return.
You can't deduct any self-employment taxes you might have paid, because these represent FICA taxes—Social Security and Medicare taxes—and 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. You must itemize on your state tax return in order to claim it.
Oregon's Federal Income Tax Deduction
Oregon allows a deduction for your total federal tax liability after adjusting for certain federal tax credits. The amount of the deduction is limited to $7,050 for the 2021 tax year—the return you'll file in 2022. If you're married and file a separate tax return, you can deduct up to $3,525.
The deduction is also phased out and eventually eliminated for higher earners. Your deduction will be $5,650 or less if you're a single taxpayer and your AGI was more than $135,000 in 2021. 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 $5,650 with an AGI of $250,000 or more. The deduction phases out completely at incomes of $290,000 or more in 2021.
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. You might have to adjust the deduction you claim on your state tax return if you file an amended federal tax return.
Filing Your State Income Tax Return
Most states, as well as the federal government, prefer that you prepare and file your return electronically. You'll most likely have a more accurate return if you use a software program. You'll get your refund sooner—if you're entitled to one—when you e-file and choose direct deposit.
Many states provide free software programs on their websites. Purchased tax software programs like TurboTax usually include state tax return preparation for most, but not all, states. You might have to pay extra to file a state return with your tax prep software.