No, you don't have to take a deduction for state and local income taxes. Not taking that deduction is a good idea because if you don't deduct it, it is not taxable income for next year.
The difficulty is that if your state and local income taxes are on your federal return, they automatically flow to itemized deductions.
To change that, you have to choose to deduct state sales tax instead. Here is how to do that:
- Use the search box toward the upper right corner to search for Sales tax deduction.
- Click on Jump to sales tax deduction.
- You will get a message pointing out that your state and local income tax is more, select Try Sales Tax Deduction Anyway.
- Select Easy Guide.
- Answer the questions about sales tax and where you lived.
- When you get to the screen that says, We've Chosen a Deduction for You at the top, you will see which amount is higher.
- If it is State and local income tax, you can switch by checking the box that says Change your deduction.
- Three choices will pop up, select Sales Tax deduction at the bottom.
Based on what you said, this will not change your total itemized deductions, but you won't have to report your state refund as income next year.
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