The latest IRS guidane that specifically addresses this was made in 2025. A longer explanation is here:
https://rsmus.com/insights/tax-alerts/2025/new-irs-guidance-on-tax-treatment-of-state-paid-leave-pro...
But the summary from the IRS ruling (Rev. Rul. 2025-04) is this:
Employer must include the employee contribution as wages on employee’s Form W-2. The employee contribution is included in employee’s Federal gross income as wages. Employee may deduct the employee contribution as State income tax under § 164, if employee itemizes deductions on employee’s Federal income tax return, but only to the extent the deduction for State tax paid does not exceed the SALT deduction limitation provided under § 164(b)(6)
So the IRS has said that FAMLI contributions can be deducted up to the limit of state income tax exclusions.
