Is it required to deduct "State Income Taxes Paid" if you itemize (Schedule A)?

[MelO4]

I'm itemizing this year because I had huge medical expenses.  However, I don't want to include the "State Income Taxes Paid" as a deduction because then if I receive it as refund next year I will have to pay income tax on it because I received a deduction for it this year.  If you file a Schedule A, is it mandatory to include "State and Local Income Taxes Paid" Line 5a?

[Mike9241]

no, because you can choose to take a sales tax deduction instead. 

[MelO4]

What if you don't want to take the Sales Tax Deduction either?  Just leave Sch A, line 5A blank?

[rjs]

If you do not deduct the state income taxes paid, then you are paying income tax on it this year instead of paying income tax on it next year. (If you get a state refund, it's possible that only part of the state refund would be taxable next year.)

Why would you not deduct the sales tax? It reduces your tax (or increases your refund) this year, and has no effect on next year.

[MelO4]

I thought the State Tax deduction rule was: if you deduct the State Tax this year (get a benefit) but then get a refund of it next year, then you are taxed on the State Refund (paying back the benefit).  

I'm getting confused because it's an Estimated Payment and I'm hoping I get most of it back next year.  

[MelO4]

Sorry, you wrote: why don't you take the sales tax deduction?  

I'm not taking the sales tax deduction because I don't know what that means.  This is getting too complicated.  I know you can do it through a simplified method, without saving receipts, but my medical expenses were high enough on Schedule A.

Are you saying that since I am not taking the Standard Deduction, I could deduct the Sales Tax paid and should?

[VolvoGirl]

Why don't you want to take the Sales Tax deduction instead?  You don't have to claim that as income next year.  If you are going to itemize you should try to take everything you can get.  

[rjs · Accepted solution]

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@MelO4 wrote:

I thought the State Tax deduction rule was: if you deduct the State Tax this year (get a benefit) but then get a refund of it next year, then you are taxed on the State Refund (paying back the benefit).  

I'm getting confused because it's an Estimated Payment and I'm hoping I get most of it back next year.  

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There's no way to get a federal tax benefit for state income tax that you don't actually pay. If you pay it this year and get it refunded next year, it's the same as if you never paid it in the first place. There's no federal tax benefit either way.

If you deduct it this year you get a federal tax benefit this year. If it's refunded next year, you pay back the benefit that you got, so you have no net federal tax benefit. If you don't deduct it this year you don't get any federal tax benefit this year or next year, so you have no net federal tax benefit. You end up the same in either case.

Why do you want to apply your state refund to next year if you expect to get most of it back next year? You're just lending the state your money for a year, and not earning any interest on it. You should just take the state refund this year.

[rjs]

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@MelO4 wrote:

Sorry, you wrote: why don't you take the sales tax deduction?  

I'm not taking the sales tax deduction because I don't know what that means.  This is getting too complicated.  I know you can do it through a simplified method, without saving receipts, but my medical expenses were high enough on Schedule A.

Are you saying that since I am not taking the Standard Deduction, I could deduct the Sales Tax paid and should?

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Once your itemized deductions are more than your standard deduction, you should take every deduction that you can. Any additional deductions reduce your tax even more (except for certain deductions that are capped).

[MelO4]

Thanks so much for your replies!  

You wrote: Why do you want to apply your state refund to next year if you expect to get most of it back next year?

My answer: Fear.  lol  I would rather pay more than necessary than get any notice saying I owe or am penalized.  It's like the running back who dwells on that one missed catch and not all the good catches he made.  Thank you!!!

[Hal_Al]

Q.  Is it required to deduct "State Income Taxes Paid" if you itemize (Schedule A)?

A. No.

You may limit your state income tax deducton amount to the amount that will not be refunded. 

You have to use a work around in TurboTax (TT). For how to do that, see https://ttlc.intuit.com/community/state-taxes/discussion/excess-state-income-tax-withheld-for-2017-i...

As others have said, the taxable amount of your state refund may be less that the full amount, if the amount of sales tax you "coulda deducted" was more than the allowable income tax deducted. This is unusual, but should be considered. 

[rjs]

The taxable amount of the state refund can also be less than the full amount if your deduction for state and local taxes was limited by the $10,000 cap.

[MelO4]

Thank you for your suggestion of taking the Sales Tax deduction instead.  I think I will do that.  I've looked it up and may be easier in the long run.  Thank you!

[Opus 17]

"Is it required to deduct"

Maybe.  There are some circumstances where failing to take a tax deduction will cause you to have increased taxable income that may result in other benefits to you.  (Such as having higher income to qualify for a mortgage.)  In that case, failing to take a legal tax deduction that is open to you may be considered fraud.

"because then if I receive it as refund next year I will have to pay income tax on it"

This is very fuzzy thinking.  Suppose you pay $5000 in state taxes, and take the deduction.  You will save about $1100 this year on your federal taxes.  Then next year you get a $1000 refund that must be reported as taxable income.  You will pay $220 in higher income taxes next year.  You are still $880 ahead.  Why would you not want to take the deduction?

[Opus 17]

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@MelO4 wrote:

Thank you for your suggestion of taking the Sales Tax deduction instead.  I think I will do that.  I've looked it up and may be easier in the long run.  Thank you!

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Why pay $1 more tax than necessary?  Take the largest deduction allowed.