How to Deduct State Tax Expenses on Schedule A Line 1

When filing your federal income tax return, you can choose between the standard deduction or itemizing deductions on Schedule A (Form 1040). If your total itemized deductions exceed your standard deduction, you can reduce your taxable income. The first category of itemized deductions on Line 1 is for state and local taxes you paid during the year. This SALT deduction allows you to subtract certain non-federal taxes from your federally taxable income, subject to specific rules and limitations.

Choosing and Calculating Your Line 1a Deduction

On Line 1a, you must choose to deduct either state and local income taxes or general sales taxes; you cannot deduct both. For most taxpayers in states with an income tax, the income tax deduction is larger. For those living in states with no state income tax, deducting sales tax is the only option on this line.

To calculate your state and local income tax deduction, gather all records of payments made during the year. The most common source is Box 17 of your Form W-2, showing the state income tax withheld by your employer. You must also include state income tax withheld on Form 1099s, estimated tax payments made to the state, and any amount paid with your prior year’s state tax return.

If you received a state or local income tax refund, its tax treatment depends on the deduction you took in the prior year. If you claimed the standard deduction on your federal return in the prior year, the refund is not taxable. If you itemized, the refund is generally considered taxable income in the year you receive it and is reported separately, not as a reduction to your current year’s deduction.

You can elect to deduct general sales taxes instead of income taxes. The IRS provides two methods: using the optional sales tax tables or tracking actual expenses. The tables, found in the Schedule A instructions or an online IRS calculator, provide a deduction amount based on your income and family size. You can also add the actual sales tax paid on large purchases, such as a motor vehicle or boat, to the table amount.

The second method is to deduct the actual amount of general sales tax you paid, which requires keeping receipts for all purchases to substantiate your claim. This approach is less common because of the record-keeping involved, so most people use the IRS optional sales tax tables.

Identifying Other Deductible State and Local Taxes

Line 1b is for state and local real estate taxes you paid on property you own, such as your primary residence or a vacation home. The tax must be assessed based on the value of the property. The deductible amount is often reported by your mortgage lender on Form 1098, Mortgage Interest Statement.

You cannot deduct taxes paid on rental properties you own, as those are business expenses reported on Schedule E. Charges for services or local benefits, such as special assessments for sidewalks or sewer lines, are not deductible as real estate taxes. Homeowner’s association (HOA) fees also do not qualify.

Line 1c allows for the deduction of state and local personal property taxes. For a tax to be deductible, it must be an ad valorem tax (based on the value of the property) and be imposed annually. The most common example is the value-based portion of an annual car registration fee.

Many vehicle registration fees combine a flat administrative fee and a value-based tax. In these cases, only the portion of the fee based on the vehicle’s value is deductible. If the fee is a flat amount that does not change based on the car’s value, it is not deductible.

Applying the SALT Deduction Limit

After calculating the amounts for Line 1a, 1b, and 1c, you combine them. The sum is entered on Line 1d of Schedule A, representing your total state and local taxes paid for the year before any limitations are applied.

The Tax Cuts and Jobs Act of 2017 introduced a cap on the SALT deduction. Your deduction is limited to a maximum of $10,000 per household per year. For taxpayers using the Married Filing Separately status, this limit is $5,000.

To apply this limitation, you enter the lesser of your total taxes from Line 1d or the applicable cap on Line 1e. For example, if your total state and local taxes paid were $14,000, your deduction is capped at $10,000. If your total taxes were $8,000, you would deduct the full $8,000.