Reducing state taxes

[tonybeo]

I am trying to figure out if there is a way to reduce my Louisiana state tax.  I have very low federal tax because most of my income was from qualified dividends and capital gains but was low enough to keep me within the 15% tax bracket and thus zero tax on those gains.  But on my state return, I have a very large tax bill due to the state not having the same tax rules with regard to dividends and capital gains.

Is there something that I can do to reduce those state taxes next year or even on last year's tax return that I am working on now?

Thanks.

[Opus 17 · Accepted solution]

Any deductions for 2021 would have had to be taken in 2021.  

The only state-specific thing I can think of for 2022 would be to contribute to a 529 education account.  You can contribute up to $2400 on a tax-deductible basis.  529 accounts are not federally tax-deductible, but the account grows tax-free and if you use the funds in the account for qualified tuition expenses for yourself or your child dependent, the withdrawals are tax-free (meaning you don't pay tax on the gains). Qualified tuition expenses can include some elementary and secondary expenses as well as college tuition, but this depends on federal and state rules.  You can also set up a 529 account for a beneficiary who is not your own child (like a grandchild or niece or nephew).  Your contributions are tax-free in the state, up to $2400, and the beneficiary can withdraw the funds for their education expenses tax-free.

529 plans can be an important way to plan for education expenses, but they should not be jumped into with our more research on your part to make sure they are suitable for you.  And, putting money in such an account may lower your state tax but it also means that you don't have the money to spend yourself, now or in the future.

Investing in state and local government bonds is often tax-free, but that would apply to the interest income, and not the principle, which you just got paid from other investments.

You should probably see a financial advisor if your income stream is not being taxed the way you like, they will know more about the options available to you.