Video transcript:
Hello, I’m Scott from TurboTax, with important news for all taxpayers who paid any type of state tax this year. Do you live in a state that imposes an income, sales, real estate or personal property tax? If you make payments for any of these taxes, you should know that the IRS may let you deduct them on your federal tax return.
Deductions for these state taxes are available if you prepare your return on Form 1040 and itemize your deductions on Schedule A, which is the only form you can report a state tax deduction on. Most of the states, and even some local governments, impose an income tax on their residents and other individuals who earn money within their state. And if you are employed, it’s likely you will see these taxes withheld from your salary in the same way federal taxes are. You can deduct all state income tax payments you make during the year (for tax years before 2018. Beginning in 2018, the deduction limit is $10,000) —which includes the withholding amounts reported on your W-2s and 1099s. Once you calculate the deduction, you must report it in the “taxes you paid” section of Schedule A.
Keep in mind that your state tax refund may be taxable on the next federal return you file. This is because the IRS allows you to deduct your state tax payments rather than the amount of tax you actually owe on your state return. So if you overpay your state taxes and receive a refund, you may need to report it as income on next year’s federal. However, if your state doesn’t require the payment of income taxes, or you suspect that you pay more in sales taxes, you can deduct your sales tax payments instead—but you can never deduct both.
There are two ways to calculate your state sales tax deduction. You can either estimate your annual payments using the IRS optional sales tax tables in the instructions to Schedule A, or if you retain receipts for your purchases, you can use the actual amount of tax you pay. Your local government may also assess a real estate tax that is based on the value of your home. So if you pay this type of tax, your payments are deductible on Schedule A—n addition to your state income or sales tax deduction. And lastly, your state may charge you a separate tax on the value of your personal property, such as your car. As long as the tax is assessed on at least an annual basis—deduct these payments on your Schedule A, as well.
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