Federal law requires that states allow you to claim a credit for, or deduct, income taxes that you've paid to other states. It makes sense you should be able to deduct your federal taxes as well, but this isn't always the case.
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 allows a deduction for your total federal tax liability from your federal return, but non-residents can only claim the deduction for taxes associated with income earned within the state.
You can't claim the state's federal income tax deduction if you file Alabama's Simplified Short Form tax return (EZ) form.
Iowa allows for a deduction of all federal taxes actually paid in cash during the year, but don't take the term "cash" too literally. In tax terms, that includes checks you wrote, debits from your bank account, deferred refunds, and paycheck withholdings.
The deduction is equal to 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Governor Kim Reynolds attempted, unsuccessfully, to have this deduction repealed from the state's tax code back in 2018.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 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.
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 maximum deduction is $5,000 for single filers, and $10,000 for married taxpayers who file jointly. 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 have filed in 2020—the deduction is eliminated at an AGI of $125,001 or more per individual.
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 per se.
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 allows a deduction for your total federal tax liability after adjusting for certain federal tax credits. The amount of the deduction is limited to $6,800 as of the 2020 tax year—the return you'd file in 2021. 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 2020. 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 completely if you earned $290,000 or more in 2020.
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 most likely have a more accurate return if you use a software program, and 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, however.
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.