Can I Deduct State Income Tax on My Federal Return?
Claiming a federal deduction for state income taxes paid involves key considerations that determine its value and whether it's the right choice for you.
Many taxpayers wonder if the state income taxes they pay throughout the year can lower their federal income tax bill. The short answer is yes, but this benefit is governed by a specific set of rules and limitations that not everyone can use. The ability to deduct these taxes depends on a taxpayer’s financial situation and is only available to those who itemize deductions.
The Prerequisite of Itemizing Deductions
When you file your federal income tax return, you have a choice between taking the standard deduction or itemizing your deductions. The standard deduction is a fixed dollar amount, determined by your filing status, age, and whether you are blind, that you can subtract from your adjusted gross income (AGI). For tax year 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly, increasing in 2025 to $15,000 and $30,000, respectively.
The deduction for state and local income taxes is an itemized deduction, meaning you can only claim it if you choose to itemize. Other common itemized deductions include mortgage interest, charitable contributions, and medical expenses exceeding 7.5% of your AGI.
To make this decision, you must add up all your potential itemized deductions, including state income taxes. If the total is greater than the standard deduction for your filing status, itemizing will likely result in a lower tax liability. If the total is less, you are better off taking the standard deduction and cannot deduct your state income taxes.
The State and Local Tax (SALT) Deduction Cap
A limitation on deducting state and local taxes is the SALT deduction cap, a provision introduced by the Tax Cuts and Jobs Act of 2017. This rule limits the total amount you can deduct for all state and local taxes combined to $10,000 per household per year. For married taxpayers who file separate returns, this limit is reduced to $5,000 each.
The taxes subject to this limit include state and local property taxes plus either state and local income taxes or state and local general sales taxes. You cannot deduct more than $10,000 in total from these categories combined, even if your actual payments were higher. This cap is scheduled to expire at the end of 2025 unless Congress acts to extend it.
For example, if you paid $8,000 in state property taxes and $7,000 in state income taxes, your total is $15,000. Despite this, the SALT deduction cap restricts your federal deduction for these taxes to $10,000.
Deciding Between the Income Tax and Sales Tax Deduction
When itemizing, the IRS allows you to deduct either your state and local income taxes or your state and local general sales taxes. You cannot deduct both in the same year.
Deducting sales taxes is the only option for residents of states that do not have a state income tax. It can also be the better choice for taxpayers who made significant purchases during the year, such as a vehicle or boat, as the sales tax on these items can exceed their state income tax liability.
To calculate your sales tax deduction, you can total the actual amount of sales tax paid by keeping all your receipts or use the optional sales tax tables provided by the IRS. The IRS also offers an online Sales Tax Deduction Calculator to help determine the amount you can claim based on your income and location.
Reporting the Deduction on Your Tax Return
The deduction for state and local taxes is claimed on Schedule A (Form 1040), Itemized Deductions. You will report state and local income taxes or general sales taxes on line 5a.
The amount you report for state and local income taxes should be the total of all payments made during the tax year. This includes state income tax withheld from your wages as shown on your Form W-2, any estimated tax payments you made to the state, and any amount you paid with your prior year’s state tax return that was filed during the current year.
After entering your income or sales tax amount on line 5a and your real estate taxes on line 5b, you will sum them up. The total is reported on line 5e. This final amount is then carried to line 7 of Schedule A as part of your total itemized deductions.
Handling State Tax Refunds
Receiving a state tax refund can have federal tax implications due to the “tax benefit rule.” This rule states that if you receive a refund for an expense you deducted in a prior year, you may have to include that refund amount in your income for the year you receive it, but only if you received a tax benefit from the original deduction.
If you took the standard deduction on your federal return in the year the state taxes were paid, your state tax refund is not taxable. This is because you did not receive a federal tax benefit from deducting those specific state taxes.
If you itemized deductions, your state tax refund is generally taxable, but only to the extent that the original deduction provided a tax benefit. For example, suppose you paid $12,000 in state and local taxes but were limited to the $10,000 SALT deduction. If you later receive a $3,000 state tax refund, only $1,000 of that refund is taxable, as the first $2,000 is considered a return of the taxes you were unable to deduct.