Question

For whom is beneficial to deduct the amount paid in state income tax from their income for purposes of computing federal income tax?

Answer 1

Deducting state income tax from federal income tax reduces overall tax liability and is beneficial for individuals living in high-income tax states. However, not all taxpayers will benefit from this deduction.

Step-by-step explanation:

The benefit of deducting the amount paid in state income tax from their income for purposes of computing federal income tax is that it reduces the taxpayer's overall tax liability. By deducting the state income tax paid, individuals can lower their taxable income, resulting in a lower federal tax obligation. This is particularly beneficial for individuals who live in states with high income tax rates.

For example, let's say an individual's taxable income is $50,000 and they paid $5,000 in state income tax. If they deduct the full amount of state income tax paid, their taxable income for federal tax purposes would be reduced to $45,000. This reduction in taxable income would lead to a lower federal tax liability, potentially resulting in a higher tax refund or a lower tax payment.

It's important to note that not all taxpayers will benefit from deducting state income tax. In some cases, individuals may opt for the standard deduction instead of itemizing deductions, and for them, the state income tax deduction may not be advantageous.

Answer 2

Obvious advantages stem from being able to deduct the full cost of state and local taxes you have to pay each year. Every deduction from taxable income helps, and these taxes can sometimes be significant. It's something of a double hit if you have to pay taxes to your state and also pay federal tax on taxes you paid to your state.

The state and local tax deduction (SALT) prevents that from happening, at least to some extent.

Rules for the SALT Deduction

All income taxes that are imposed by a state, local, or foreign jurisdiction can be deducted subject to a few rules.

First, you must itemize your deductions on Schedule A to claim them. This means foregoing the standard deduction, which is often more than the total of a taxpayer's itemized deductions for the tax year. Don't be penny wise and pound foolish and give the Internal Revenue Service more money than you have to. Make sure your total itemized deductions exceed the standard deduction for your filing status so itemizing is worth your while. Otherwise, you'll be paying taxes on more income than you have to, which was what you were trying to avoid in the first place.

The tax must be imposed on you personally. You can't claim a deduction for income taxes paid by one of your dependents—and in some cases, even by your spouse. You must have paid them during the tax year for which you're filing.

Eligible expenses that can be deducted as state and local income taxes include:

Withholding for state and local income taxes as shown on Form W-2 or Form 1099

Estimated tax payments you made during the year

Extension tax payments you made during the year

Payments made during the year for taxes that arose in a previous year

Mandatory contributions to state benefit funds