Are State and Local Taxes Tax Deductible?

Updated on January 10, 2024

At a Glance

  • State and local taxes (SALT) can be deducted if you itemize deductions on your federal tax return.
  • The Tax Cuts and Jobs Act (TCJA) placed a cap on SALT deductions at $10,000 for single filers and married couples filing jointly.
  • Good record-keeping is important when claiming the SALT deduction.
  • Some taxes are not eligible for the SALT deduction, including business or rental property taxes and fees for services.

For many taxpayers, state and local taxes (SALT) represent a significant expenditure each year. The ability to deduct these taxes from your federal tax return could potentially offer considerable savings. However, changes to tax laws, particularly with the introduction of the Tax Cuts and Jobs Act (TCJA) in 2017, have impacted the way these deductions are claimed. This article details the deductibility of state and local taxes and how to navigate the current tax rules.

What Are State and Local Taxes?

State and local taxes include:

  • State and local income taxes or sales taxes (not both)
  • Real estate property taxes
  • Personal property taxes

These taxes can be deducted if you choose to itemize your deductions on your federal tax return rather than taking the standard deduction.

Understanding the SALT Deduction Cap

The TCJA placed a cap on the total amount of SALT deductions a taxpayer can claim in a year. As of 2018, the limit is $10,000 for single filers and married couples filing jointly ($5,000 for married filing separately). This cap includes the total combined amount of state and local income, sales, and property taxes that can be deducted.

Further details on the cap and the SALT deduction can be found on the IRS’s page regarding SALT.

How to Claim State and Local Tax Deductions

To claim a deduction for state and local taxes, you must:

  • Itemize your deductions using Schedule A (Form 1040), Itemized Deductions.
  • Elect either state and local income taxes or sales taxes to include as part of your SALT deduction.
  • Add any deductible personal property taxes and real estate taxes to the chosen income or sales taxes to calculate your total SALT deduction.

Supporting Documentation

When claiming the SALT deduction, good record-keeping is essential. Keep receipts, bills, tax return copies from state and local jurisdictions, and any other relevant documents that substantiate the amounts claimed.

Limitations and Exceptions

Certain taxes are not eligible for the SALT deduction. These include:

  • Taxes paid for business or rental property purposes (they are generally deductible on Schedule C or E, respectively)
  • Fees or charges for services (like water or trash collection)
  • State and local taxes paid on amounts not included in Adjusted Gross Income (AGI)

An IRS FAQ page addresses some common questions about the SALT deduction limitations under the TCJA.

Final Thoughts

While state and local taxes remain deductible on federal returns, the SALT deduction cap may significantly impact your ability to deduct the full amount. Taxpayers living in states with higher taxes often feel the effects more acutely. Understanding these deductions, and planning your taxes with these changes in mind, is more important than ever.

Itemizing to claim state and local tax deductions might not be beneficial for everyone, especially since the standard deduction has nearly doubled under the TCJA. Therefore, it’s crucial to calculate whether itemizing or taking the standard deduction will provide the greater tax benefit.

For more information on itemizing and deductibility of specific taxes, consult the IRS’s guidelines or seek assistance from a tax professional. Additional advice can be sought through resources provided by USA.gov’s Taxes section, which include official tax information and contacts for further assistance.

Navigating the SALT deduction cap requires careful consideration of your financial situation and tax strategy. Planning ahead and consulting updated resources will help ensure you take full advantage of tax deductions available to you.

Learn More

Frequently Asked Questions (FAQ)

Can I deduct all state and local taxes on my federal tax return?

State and local taxes can be deducted on your federal tax return, but there is a cap on the amount you can deduct.

What is the cap on state and local tax deductions?

As of 2018, the cap on state and local tax deductions is $10,000 for single filers and married couples filing jointly.

Which taxes are eligible for the state and local tax deduction?

Eligible taxes for the state and local tax deduction include state and local income taxes or sales taxes (not both), real estate property taxes, and personal property taxes.

Can I deduct business or rental property taxes?

No, taxes paid for business or rental property purposes are generally deductible on Schedule C or E, respectively.

Are fees or charges for services eligible for the state and local tax deduction?

No, fees or charges for services, such as water or trash collection fees, are not eligible for the state and local tax deduction.

How do I claim the state and local tax deduction?

To claim the state and local tax deduction, you must itemize your deductions using Schedule A (Form 1040), Itemized Deductions.

Can I deduct state and local taxes paid on amounts not included in Adjusted Gross Income (AGI)?

No, state and local taxes paid on amounts not included in Adjusted Gross Income (AGI) are not eligible for the deduction.

What supporting documentation do I need for the state and local tax deduction?

When claiming the state and local tax deduction, it is important to keep receipts, bills, tax return copies, and other relevant documents that substantiate the amounts claimed.

How do I determine if itemizing or taking the standard deduction is more beneficial for me?

You should calculate whether itemizing or taking the standard deduction will provide the greater tax benefit based on your specific financial situation.

Where can I find more information on state and local tax deductions?

For more information on state and local tax deductions and the latest guidelines, consult the IRS’s guidelines or seek assistance from a tax professional.

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Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.