When you itemize your deductions, it means listing their details by completing Schedule A and submitting it to the Internal Revenue Service (IRS) with your federal tax return (Form 1040). Itemizing can sometimes help reduce your taxable income, but some tax rules can limit some of them. The State and Local Tax (SALT) deduction is one of the exceptions that is subject to some restrictions.
Rules for State and Local Tax Deduction
All taxes levied by the state or local authority can be deducted, according to certain rules. First, you must itemize your deductions on Schedule A to claim them. However, itemizing means you forfeit the standard deduction, which may be larger than the total of your itemized deductions for the tax year.
Tax Deduction Requirements
The tax must be imposed on you personally. You cannot claim a deduction for taxes paid on income on behalf of one of your dependents – and in some cases, even by your spouse. You must have paid them during the tax year you are filing.
Tax Deduction Limits
The deduction for state and local taxes is no longer unlimited. At one time, you could deduct what you paid in taxes, but the Tax Cuts and Jobs Act (TCJA) limits the SALT deduction to $10,000, or only $5,000 if you are married but filing a separate return. This limit applies to state income taxes, local income taxes, and combined property taxes.
Documents You’ll Need to File
Local and income tax payments can appear on a variety of different documents. Keep copies of the checks or your statements showing the deductions from your account when you pay estimated taxes to your state or municipality.
End-of-Year Tax Planning
The state income tax deduction can aid in end-of-year tax planning, as taxpayers can choose to increase their local tax payments at the last moment to cover any anticipated state liability that will occur for the year.
Sales Tax Deduction Option
You may consider deducting sales tax instead of local income tax as an alternative strategy – it’s an either/or option. You can claim income tax or sales tax but not both.
Special Rules for Couples
Married couples filing separate returns must both either claim the standard deduction or both itemize their deductions. Married couples filing jointly can deduct all state and local income taxes paid by each during the year, whether those tax payments were made separately or jointly, up to $10,000. Married couples filing separately can only deduct the local and state income taxes they paid personally, but up to $5,000.
Frequently Asked Questions
What are state and local taxes?
What should I do if I forgot to deduct state and local taxes on my tax return?
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Sources:
IRS. “Topic No. 503 Deductible Taxes.”
IRS. “Topic No. 501 Should I Itemize?”
IRS. “Rev. Proc. 2021-45. Page 14.”
IRS. “Rev. Proc. 2022-38. Page 13.”
Congress.gov. “H.R.1 – An Act To Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018.”
IRS. “Frequently Asked Questions: Individuals 2.”
Congressional Research Service. “The Alternative Minimum Tax for Individuals: In Brief. Page 3.”
IRS. “2021 Instructions for Schedule A.”
IRS. “Publication 555, Community Property.”
IRS. “Other Deduction Questions.”
IRS. “Instructions for Form 1040-X.”
Source: https://www.thebalancemoney.com/state-income-tax-deduction-3192840
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