Can You Deduct State Taxes Paid for a Prior Year?
Learn how to deduct state taxes on your federal return. Understand the crucial timing rules for when payments qualify, regardless of the tax year they cover.
Taxpayers can often reduce their federal taxable income by deducting certain state and local taxes they have paid. The ability to deduct these taxes depends on the type of tax paid and the accounting method used for federal income tax purposes. For most individual taxpayers, this involves considering when the payment was actually made, regardless of the tax year to which the tax originally applied.
Understanding Deductible State Taxes
Most individual taxpayers use the cash method of accounting. Under this method, state and local taxes are deductible in the year they are paid. For example, 2024 state taxes paid in 2025 are deductible on the 2025 federal return, assuming other requirements are met. This includes estimated payments and withheld taxes.
The types of state and local taxes that are generally deductible include state and local income taxes, or a choice between state and local general sales taxes. Additionally, state and local real property taxes, along with state and local personal property taxes, are typically deductible.
A state tax refund received in a subsequent year for a prior year’s deduction might be subject to the “tax benefit rule.” If a taxpayer deducted state taxes in a previous year and later received a refund for those taxes, the refund may be considered taxable income in the year it is received to the extent that the prior deduction reduced their federal tax liability. Taxpayers who claimed the standard deduction in the prior year generally do not need to include a state tax refund as income.
The State and Local Tax Deduction Limit
The total amount of state and local taxes that can be deducted on a federal income tax return is subject to a limitation. This limit, commonly known as the SALT cap, was set at $10,000 for most taxpayers ($5,000 for married individuals filing separately). This cap applies to the combined total of state and local income taxes (or general sales taxes if elected) and state and local real and personal property taxes.
This limitation significantly impacts taxpayers, particularly those residing in areas with high state income taxes or substantial property tax burdens. Any amount of state and local taxes paid exceeding the $10,000 cap is not deductible for federal income tax purposes. For example, if a taxpayer pays $15,000 in state and local taxes, only $10,000 of that amount can be claimed as a deduction.
Recent legislative changes, specifically the “One Big Beautiful Bill Act” signed into law on July 4, 2025, have temporarily altered this cap. For tax years 2025 through 2029, the State and Local Tax (SALT) deduction limit will increase to $40,000 per household. This increased cap is subject to a phaseout for higher-income individuals, beginning at $500,000 of income in 2025. The cap is also scheduled to increase by 1% each year through 2029 before reverting to the original $10,000 limit in 2030.
Claiming the Deduction
To claim deductions for state and local taxes, individual taxpayers must itemize their deductions on their federal income tax return. This means they must choose to forgo the standard deduction and instead list out eligible expenses on Schedule A (Form 1040), Itemized Deductions. The decision to itemize is advantageous when the total of all allowable itemized deductions exceeds the applicable standard deduction amount.
On Schedule A, state and local income taxes (or general sales taxes) are reported on specific lines, and real estate and personal property taxes are reported separately. Taxpayers will then sum these amounts, applying the current year’s State and Local Tax (SALT) deduction limit. It is important to note that the $40,000 limit for 2025, as established by the “One Big Beautiful Bill Act,” will apply to the total of these taxes.
Maintaining accurate and organized records is important for substantiating any claimed deductions. Relevant documents include W-2 forms, which show state income tax withheld, property tax bills, and records of any estimated state tax payments made throughout the year. These records provide the necessary evidence to support the amounts reported on Schedule A in the event of an inquiry. Tax records should generally be kept for at least three years from the date the return was filed.