Itemizing your deductions means listing them in detail by completing Schedule A and submitting it to the Internal Revenue Service (IRS) with your Form 1040 tax return. Itemizing can sometimes help reduce your taxable income, but a few tax rules can limit some of them. The state and local income tax (SALT) deduction is one that's subject to certain limitations.
State and local taxes can sometimes be significant, so it's an obvious advantage to be able to deduct the full amount you pay, but that's not always possible. The 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 or local 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 that your itemized deductions, including all other deductions you're qualified to claim in addition to state and local tax deductions, exceed the standard deduction for your filing status, or itemizing can actually cost you tax dollars.
The Tax Cuts and Jobs Act (TCJA) virtually doubled standard deductions for every filing status when it went into effect in 2018, so it might be less likely that the total of all your itemized deductions will exceed these amounts for tax year 2021, the tax return you'll file in 2022:
- $12,550 for single filers and those who are married filing separately
- $18,800 for heads of household
- $25,100 for married taxpayers who file jointly
In tax year 2022, to be filed in 2023, the deductions will increase to:
- $12,950 for single filers and those who are married filing separately
- $19,400 for heads of household
- $25,900 for single fliers and those who are married filing jointly
The tax must be imposed on you personally. You can't claim a deduction for income taxes paid on behalf of 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:
- Withholding for state and local income taxes, as shown on your Form W-2 or Form 1099
- Estimated tax payments you made during the year
- Extension tax payments you made during the year
- Payments made during the year for taxes that arose in a previous year
- Mandatory contributions to state benefit funds
2021 Tax Deduction Limits
The deduction for state and local taxes is no longer unlimited. At one time, you could deduct as much as you paid in taxes, but TCJA limits the SALT deduction to $10,000, or just $5,000 if you're married but file a separate tax return. 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 can't claim the entire $12,000. You can only claim the capped amount of $10,000.
This TCJA rule will stand through at least 2025, when the law will potentially expire unless Congress acts to renew it.
Documents You'll Need for Filing
Payments of state and local income taxes can show up on a variety of different documents. Keep copies of your checks or your bank statements showing the debits from your account when you pay estimated taxes to your state or municipality.
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. These documents 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): This might show state income tax withholding in box 15 and local income tax withholding in box 17.
- Form 1099-G (Certain Government Payments): This should show state income tax withholding in box 11.
- Form 1099-INT (Interest Income): The 1099-T might show state income tax withholding in box 17.
- Form 1099-DIV (Dividends and Distributions): This might show state income tax withholding in box 16.
- Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts): Form 1099-R shows state income tax withholding in box 14 and local income tax withholding in box 17.
- Form 1099-MISC (Miscellaneous Income): This form should show state income tax withholding in box 16.
- Form 1099-NEC (Nonemployee Compensation): This one might show state income tax withholding in box 5.
- 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 should be found on that year's tax return.
Year-End Tax Planning
The state income tax deduction can help with 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 could pay your fourth state estimated tax payment, normally due on January 15, in December. That would boost your itemized deductions and potentially reduce your federal tax liability for the year.
Check to see whether 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) will likely find that they receive little or no benefit on their federal return by accelerating state payments. State and local income tax deductions are added back to your taxable income when calculating the AMT.
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.
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 have been officially assessed as of the date you pay them, which 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 might not change your federal tax liability, because the sales tax deduction is also eliminated for purposes of calculating the AMT if you're subject to it. Deducting the sales tax instead can make any state tax refunds non-taxable in the following year.
Special Rules for Spouses
Married couples who file separate returns must both claim the standard deduction, or they must both 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.
All income is considered community property if you or your spouse live in one of the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin as of 2021. Each spouse must report half of the income on their tax return when they file separately. Deductions are split in half between the two spouses as well.
Frequently Asked Questions (FAQs)
What do state and local taxes pay for?
As long as the taxes don't directly contradict the Constitution, such as by imposing a poll tax to provide election services, then states can provide public services and impose taxes as they see fit to provide for them. Schools, police, firefighters, roads, and public parks are all examples of things that taxes pay for. Check with your state treasury or local authorities for more information about how your tax dollars are spent.
What should I do if I forgot to deduct state and local taxes on my tax return?
You generally have up to three years to amend your tax returns. All you have to do is file IRS Form 1040-X with the corrected information. Your three-year window of opportunity starts on April 15 of the tax year you want to correct, unless you filed for an extension of time to file that year, in which case the three-year window starts on October 15.