(NOTE: if you’re looking for a list of itemized deductions, or more help with filling out your 1040, go back to the 1040 summary page here)
So you want to take a State and Local Tax deduction, huh? Good. It’s really pretty simple for the vast majority of people. Just take a look at your W-2, find the State Taxes Paid amount (and possibly your Local Taxes Paid amount), check the box on the 1040 Schedule A saying you want to deduct income taxes, and put in the amount you paid DURING the year.
That’s it. Now you take a nice sip of Coke Zero while you ponder your next tax deduction.
Not a W-2 employee? Had to pay taxes other than those withheld from your paycheck? Got a state income tax refund? Then get ready for things to get messy.
Only Paid During the Year
The first item that trips people up faster than a pair of Moon Shoes is that you can only deduct taxes you paid during the year. So if you’re filing a 2014 tax return, any taxes paid from January 1st, 2014 through December 31, 2014 can be deducted.
Let’s say you messed up on your 2012 tax return and had to pay extra 2012 tax in 2014. When would you deduct this extra payment? If you answered “2014,” you’re right!
(Note: you wouldn’t be able to deduct any interest and penalties here for filing late. Just the actual tax payment portion.)
What if you were as anxious as an elf on December 24th and paid your 2014 taxes in 2013? Well, then you’d deduct that payment in 2013, not 2014.
And if you underpaid on your 2014 state income tax return and and had to make an extra payment when you filed your 2014 return on April 15, 2015? You’d take a state and local tax deduction for that amoun in 2015.
As you’ve probably guessed by now, this makes tracking WHEN the payments were made almost as important as what year the taxes cover.
Dealing With Refunds
No one seems to concerned about not paying enough taxes, but if you are, I’m going to predict your next question: “What happens if I get a refund on my state tax? Wouldn’t that mean I took a deduction for an amount that I really didn’t pay in?”
Yes, that’s exactly what it means! If you paid $500 in estimated state taxes during 2014, and got a $200 refund, then really you only paid $300 in state taxes yet took a $500 state and local tax deduction.
As you probably guessed, the IRS does not like people taking deductions they’re not owed.
Fortunately, this doesn’t mean you have to go back and recalculate your return. Instead, you potentially have to take that refund as income on your next year’s tax return. For more information about this, click here to read my spectacular article detailing taxable refunds.
Which Local Taxes Count?
Unless you’re living in one of those few states that doesn’t have income taxes (Nevada, Wyoming, Texas, etc.), you’re filing a tax return for both your federal return and your state return, making you painfully aware what your state income taxes are. But what about your Local Taxes?
Again, this really should be an “if you’re paying it, you know” situation. If your city, county, school district, etc. has you filing an INCOME tax return, you can deduct the amounts you pay locally. This is most common in New York City and some cities and counties spread across Ohio.
There’s one small hiccup, though. Some cities around the country charge taxes not based on income and pulls it straight out of your wages, making it look like an income tax. For example, Denver charges each employee $5 per month for the benefit of working within their glowing borders. Technically, this isn’t an income tax and shouldn’t be deducted. That being said, many software providers basically force you into deducting it.
Could the IRS come back and ask for that money back if you do choose to deduct it? Absolutely. Is it likely to? No, not really. As a CPA, I probably wouldn’t sign a return that was deducting that kind of “per head” tax. But this is one where there’s enough ambiguity that it’s really up to you.
My State Doesn’t Have Income Tax!
Even if you don’t have any state income tax, you can still take a deduction. It’ll just be a sales tax deduction instead. And now I have a post talking about that, too.
Picture by Chris Radcliff