Millions of Americans submit their federal tax return every year without realizing they can miss out on cash. One of the most commonly missed deductions is for state and local taxes incurred in the preceding year. If you are subject to state income tax or sales tax in a couple of states, you might qualify for a deduction that reduces your taxable income.
This sounds complicated, but do not worry about it. The idea is simple: if you paid taxes to your state government last year, you may be able to deduct that amount when you file your federal return this year. Let us break it down in a way that will help make sense and save you some of those potential refund dollars.
What is Deductible
You may deduct state and local income taxes, or sales taxes, but not both. Most people choose income taxes because they are usually greater. For example, if you paid taxes when you filed your state tax return, or when your employer withheld state taxes from your wages, these amounts usually count.
But if you live in a state that does not tax income, like Florida or Texas, you can take a deduction on sales tax. The IRS even has a calculator for sales tax to help you determine how much you spent throughout the year.
You can also include other forms of taxes, such as:
- Property tax on your land or property
- Personal property taxes, like those on automobiles or boats
- Local income tax, which is charged by cities or counties
All these can actually add up quickly, and that translates into bigger deductions for you.
The SALT Cap: Know Your Limit
Do not get ahead of yourself, however. There is one big rule. The cap on the SALT deduction (State and Local Taxes) caps your total deduction at $10,000 ($5,000 if married filing separately). The cap was put into place in 2018 and remains today.
So, if you owed $6,000 in property taxes and $5,000 in state income taxes, you can deduct a combined total of $10,000. It will not cover all of it, but it will lower your taxable income—and that is less to the IRS.
Why It Matters
Reductions like these can really pay dividends. If your taxable income is $60,000 and you can deduct $10,000 in state taxes, that leaves only $50,000 subject to taxation. It could be the difference between paying taxes and getting a refund.
Tax professionals call this the reward for those who are diligent about record-keeping and familiar with their state rules. It is one of those “quiet” tax planning strategies most taxpayers miss because they believe last year’s payments are forgotten. They are not.
Planning Strategies to Maximize the Deduction
- Keep All Documents and Receipts: Keep proof of payment from your state rebate, property tax statements, or receipts for large purchases like cars or appliances.
- Check if You Can Claim an Amended Return: If you omitted it in past years, you can try amending your return and still claim the benefit.
- Take Itemized Deductions: This deduction only applies if you claim itemized deductions, not the standard deduction.
- Get Professional Advice: They will help determine which deduction (income or sales tax) is best suited for your situation.
The bottom line is that if you paid any state tax last year, you can use it as a deduction on your federal tax return, usually on Form 1040 Schedule, but it depends on whether you itemized your deductions.
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