Claiming the State and Local Income Tax Deduction on Federal Taxes
You'll have to itemize, and that might mean paying more than necessary
Itemizing your deductions—spelling them out in detail to the Internal Revenue Service (IRS) on your tax forms—can help reduce your taxable income. But there are a few tax rules you need to be aware of that limit how much of your state and local taxes you can deduct on your federal taxes.
Since state and local taxes can sometimes be significant, it's an obvious advantage to be able to deduct the full amount on your federal taxes. But that's not always simple to do: The State and Local Tax (SALT) Deduction lets you deduct up to $10,000 total in combined property taxes and state and local income taxes or sales taxes (but not both).
Rules for the SALT Deduction
All income taxes that are imposed by a state, local, or foreign jurisdiction can be deducted, subject to a few rules.
First, you must itemize your deductions on Schedule A to claim them. This means foregoing the standard deduction, which is often more than the total of a taxpayer's itemized deductions for the tax year.
Make sure your itemized deductions (including all other deductions in addition to state and local tax deductions) exceed the standard deduction, or itemizing won't be worth your while.
The Tax Cuts and Jobs Act (TCJA) virtually doubles the standard deductions for every filing status, so it might be less likely that the total of all your itemized deductions will exceed these amounts for tax year 2020:
- $12,400 for single filers and married filing separately
- $18,650 for heads of household
- $24,800 for married taxpayers who file joint returns
Also, the tax must be imposed on you personally. You can't claim a deduction for income taxes paid by one of your dependents—and in some cases, even by your spouse. You must have paid them during the tax year for which you're filing.
Eligible expenses that can be deducted as state and local income taxes include:
2020 Tax Deduction Limits
Unfortunately, the deduction for state and local taxes is no longer unlimited. It used to be that you could deduct as much as you paid in taxes, but TCJA now limits the SALT deduction to $10,000 ($5,000 if married filing separately). And this cap applies to state income taxes, local income taxes, and property taxes combined.
For example, you might pay $6,000 in state income taxes and another $6,000 in property taxes for the year, but you cannot claim the entire $12,000—only the capped amount of $10,000. This rule stands through 2025 when the TCJA is set to expire.
Documents You'll Need for Filing for Tax Year 2020
Payments of state and local income taxes can show up on a variety of different documents.
If you pay estimated taxes to your state or municipality, keep copies of your checks or your bank statements showing the debits from your account. State taxes can also show up on various documents related to tax withholding.
Keeping a record of all this paperwork will help you maintain a tally of how much you can deduct, up to the TCJA limit. Here's are some documents that should show how much state or local tax you paid during the year:
- Form W-2 (Wage and Tax Statement): Shows state income tax withholding in box 17. Local income tax withholding is shown in box 19 and contributions to state benefit funds can be shown in box 14.
- Form W-2G (Certain Gambling Winnings): Might show state income tax withholding in box 15 and local income tax withholding in box 17.
- Form 1099-G (Certain Government Payments): Might show state income tax withholding in box 11.
- Form 1099-INT (Interest Income): May show state income tax withholding in box 17.
- Form 1099-DIV (Dividends and Distributions): Might show state income tax withholding in box 15.
- Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.): Might show state income tax withholding in box 14 and local income tax withholding in box 17.
- Form 1099-MISC (Miscellaneous Income): Can show state income tax withholding in box 15.
- Bank statements with copies of canceled checks or debits can prove estimated payments and after-the-fact payments of state tax.
- The portion of the previous year's state refund that might have been applied toward estimated taxes.
Year-End Tax Planning
The state income tax deduction can be useful in year-end tax planning because taxpayers can elect to increase their state tax payments at the eleventh hour to cover any expected state liability that will occur for the year.
For example, you can pay your fourth state estimated tax payment, normally due on January 15, in December. This would boost your itemized deductions and can potentially reduce your federal tax liability for the year.
Check to see if increasing state tax payments at the end of the year will affect your federal return. Taxpayers who are affected by the alternative minimum tax (AMT) likely will find that they receive little or no benefit on their federal return by accelerating state payments.
State and local income taxes are deductible when you're calculating your regular federal income tax, but they're not deductible when you're calculating the AMT.
State and local income tax deductions are added back to your taxable income when calculating the AMT.
The IRS has slammed the door on paying estimated property taxes for the following year before year's end in order to claim a deduction in the current year. Those taxes must now have been officially assessed as of the date you pay them, and this often doesn't happen until after the first of the year.
The Sales Tax Option
You might consider deducting sales tax instead of the state income tax as an alternative strategy—it's an either/or option. You can claim income taxes or sales taxes, but not both.
This generally won't change your federal tax liability because the sales tax deduction is also eliminated for purposes of calculating the AMT, but at least deducting the sales tax can make any state tax refunds non-taxable in the following year.
Special Rules for Spouses
For couples who are married filing separately, either both must claim the standard deduction or both must itemize.
Married taxpayers who are filing joint returns can deduct all state and local income taxes that each of them paid during the year, regardless of whether those tax payments were made separately or jointly, up to $10,000.
Married taxpayers who file separate returns can only deduct state and local income taxes paid by them personally, however, up to $5,000.
If you or your spouse live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), all income is considered community property, and each spouse must report half of the income on their tax return if filing separately. Deductions are split in half between the two spouses as well.
Internal Revenue Service. "Topic No. 503 Deductible Taxes." Accessed March 3, 2020.
Internal Revenue Service. "Topic No. 501 Should I Itemize?" Accessed March 3, 2020.
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2020." Accessed March 3, 2020.
Internal Revenue Service. "Publication 501 (2019): Dependents, Standard Deduction, and Filing Information." Accessed March 3, 2020.
Internal Revenue Service. "2020 Form W-2: Wage and Tax Statement," Pages 8-9. Accessed March 3, 2020.
Internal Revenue Service. "2020 Form W-2G: Certain Gambling Winnings," Page 1. Accessed March 3, 2020.
Internal Revenue Service. "2020 Form 1099-G: Certain Government Payments," Page 2. Accessed March 3, 2020.
Internal Revenue Service. "2020 Form 1099-INT: Interest Income," Page 1. Accessed March 3, 2020.
Internal Revenue Service. "2020 Form 1099-DIV: Dividends and Distributions," Page 2. Accessed March 3, 2020.
Internal Revenue Service. "2020 Form 1099-R: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.," Page 2. Accessed March 3, 2020.
Internal Revenue Service. "Form 1099-MISC: Miscellaneous Income," Page 2. Accessed March 3, 2020.
Intuit Turbotax. "Top 8 Year-End Tax Tips." Accessed March 3, 2020.
Intuit Turbotax. "Alternative Minimum Tax: Common Questions." Accessed March 3, 2020.
Internal Revenue Service. "IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017." Accessed March 3, 2020.
Internal Revenue Service. "Sales Tax Deduction Calculator." Accessed March 3, 2020.
Tax Foundation. "How the State and Local Tax Deduction Interacts With the AMT and Pease Limitation." Accessed March 3, 2020.
Intuit Turbotax. "Is My State Tax Refund Taxable and Why?" Accessed March 3, 2020.
Internal Revenue Service. "My Spouse and I Are Filing Separate Returns. How Do We Split Our Itemized Deductions?" Accessed March 3, 2020.
Internal Revenue Service. "2018 Instructions for Schedule A," Page 1. Accessed March 3, 2020.
Internal Revenue Service. "Publication 505 (2019) Tax Withholding and Estimated Tax - Community Property States." Accessed March 3, 2020.