Can You Deduct State Taxes From Federal?

Individuals often wonder if they can reduce their federal income tax liability by deducting taxes paid to state and local governments. This concept, known as the State and Local Tax (SALT) deduction, can indeed lower your taxable income on your federal return. Understanding the rules and limitations surrounding this deduction is important for effective tax planning.

Types of Deductible State and Local Taxes

The federal tax code allows for the deduction of several types of state and local taxes. These generally include income taxes, real estate taxes, and personal property taxes. Taxpayers generally choose between deducting state and local income taxes or state and local general sales taxes, but not both.

If you choose to deduct sales taxes instead, you can either keep records of all actual sales tax paid or use the IRS’s optional sales tax tables for your state and locality. Real estate taxes, also known as property taxes, are levied on real property by state and local governments and are deductible. Personal property taxes, which are assessed annually on certain types of personal property and are based on the property’s value, are also eligible for deduction.

The Itemized Deduction Requirement

Claiming the state and local tax deduction is only possible if you choose to itemize your deductions on your federal income tax return. This means you must forgo taking the standard deduction. The standard deduction amounts vary based on your filing status, such as single, married filing jointly, or head of household.

Itemizing deductions involves listing out specific eligible expenses, and if the total of these expenses exceeds your applicable standard deduction amount, then itemizing typically results in a greater tax benefit. The SALT deduction is one component of these itemized deductions, alongside other categories like mortgage interest, medical expenses exceeding a certain percentage of adjusted gross income, and charitable contributions. To determine whether itemizing is beneficial, taxpayers compare their total eligible itemized deductions to their standard deduction amount, selecting the option that yields the lower taxable income.

The State and Local Tax Deduction Limit

The Tax Cuts and Jobs Act (TCJA) of 2017 imposed a limit on the total amount of state and local taxes that can be deducted. For tax years 2018 through 2025, the maximum annual deduction for all combined state and local taxes is $10,000. This limit applies to all filers except those married filing separately, for whom the limit is $5,000.

Before the TCJA, there was no federal limit on the amount of state and local taxes that could be deducted, allowing taxpayers to deduct the full amount paid. The introduction of this cap significantly reduced the tax benefit for many taxpayers, particularly those in areas with high state and local tax burdens. This provision is scheduled to expire after 2025, meaning the unlimited deduction could potentially return unless Congress acts to extend the limit.

Claiming the Deduction on Your Federal Return

To claim the state and local tax deduction, taxpayers must file Schedule A (Form 1040), titled “Itemized Deductions,” with their federal income tax return.

On Schedule A, state and local income taxes (or general sales taxes) are entered on line 5a, real estate taxes on line 5b, and personal property taxes on line 5c. The total of these amounts, subject to the $10,000 limitation, is then carried to line 5d. Accurate record-keeping is important to support the amounts claimed, such as W-2 forms showing state income tax withheld, property tax statements, and, if deducting sales tax, detailed receipts or use of the IRS sales tax calculator. The final total from Schedule A is then transferred to your Form 1040, reducing your adjusted gross income.