How does TT tax federal software calculate the option of standard or itemized deduction without knowing state tax one owes

[JQ6]

This is an education question..

My understanding is, while filling in federal section and towards the end TT calculates both the Standard and Itemized deduction and recommends the one which is higher.

My questions is, does the fed makes that recommendation after one completes the State filling because it does not know what the total state tax liability for itemized deduction until the state portion is completed ? Because in my case, I had very little amount withheld for the state taxes for my pension payout 1099, but because I sold stock with high capital gains I owe significantly more in state taxes at the time of the filling. For the fed section to accurately calculate the exact deduction for Standard or Itemized, it would need to know what is my total tax liability is ?

Thanks,   

[xmasbaby0]

@JQ6 

Whether you use standard or itemized deduction on your 2025 tax return is not determined by how much you owe to the state for 2025.  You may be confusing the requirement to enter a state refund from the prior year if you itemized deductions in that tax year.  If you itemized your deductions for 2024, for example, a 2024 state refund received in 2025 is taxable income for 2025.

IS MY 2024 STATE OR LOCAL REFUND TAXABLE?

If you used standard deduction for your 2024 tax return, you do not have to enter a state or local tax refund you received in 2025.   If you itemized deductions then your state or local refund that you claimed on the 2024 return----and received in 2025---must be entered as taxable income on your 2025 return.  If you  are not sure if you itemized for 2024, look at your 2024 Form 1040 line 12.   Do you see the standard deduction amount or something else?

2024 STANDARD DEDUCTION AMOUNTS

SINGLE $14,600    (65 or older/legally blind + $1950)

MARRIED FILING SEPARATELY            $14,600    (65 or older/legally blind + $1550)

MARRIED FILING JOINTLY $29,200    (65 or older/legally blind + $1550)

HEAD OF HOUSEHOLD $21,900    (65 or older/legally blind + $1950)

If you need to enter a state or local refund Go to Federal>Wages & Income>1099-Misc and Other Common Income>State and Local Tax Refunds on Form 1099-G

The software determines whether you can use your itemized deductions or standard deduction based on whether you have enough itemized deductions to exceed your standard deduction.

Your itemized deductions have to be more than your standard deduction before you will see a change in your tax owed or tax refund.  The deductions you enter do not necessarily count “dollar for dollar;” many of them are subject to meeting  tough thresholds—medical expenses, for example, must meet a threshold that is pretty hard to reach. (Only the amount that is MORE than 7.5% of your AGI counts)   The software program uses all the IRS rules that apply to the expenses you enter, and it tells you if you have enough to use your itemized deductions or if using the standard deduction is more advantageous for you. 

The standard deduction makes some of your income “tax free.”  It is not a refund. 

2025 STANDARD DEDUCTION AMOUNTS

SINGLE $15,750  (65 or older/legally blind + $2000)

MARRIED FILING SEPARATELY $15,750  (65 or older/legally blind +1600)

MARRIED FILING JOINTLY $31,500  (65 or older/legally blind + $1600)

HEAD OF HOUSEHOLD $23,625 (65 or older/legally blind + $2000)

For 2025 through 2028 there is an extra  deduction amount of up to $6000 per individual 65 or older filing Single, MFJ, or HOH which is phased out above certain incomes.

The $6,000 senior deduction will be calculated on 1040 Schedule 1-A page 2 Part V Enhanced Deduction for Seniors which goes to 1040 line 13b. It is separate and in addition to the Standard Deduction or your Itemized Deductions on 1040 line 12e.  Turbol Tax automatically includes it.

IRS Schedule 1-A
https://www.irs.gov/pub/irs-dft/f1040s1a--dft.pdf

[VolvoGirl · Accepted solution]

No it doesn't need to know your state tax liability or tax due is.  It goes by the year PAID.   You would be paying the 2025 state tax due in April 2026.  On your federal 2025 return you can only deduct actual state payments made in 2025.  So that would be a 2024 4th Qtr state estimated payment made in January 2025 and any state payments actually made in 2025.  If you paid the 4th Qtr 2025 state estimated payment in Jan 2026 that would go on your 2026 federal deductions.  

Like I just paid my 4th Qtr state estimated payment before Dec 31, 2025 so I can deduct it on my 2025 federal return.  It's not due until Jan 15.  

[JQ6]

@VolvoGirl  @xmasbaby0   Thank you for your reply, very much appreciate it.

I believe I understand both of your replies, though I'm still bit confused, so let me pose my question another way..

I'm trying to see if I can save on my 2025 fed taxes. I did not get any refund from the state in 2025. With that said, here's my current situation on my Georgia state taxes:

- So far ( Dec 12) I have had state taxes withheld on my pension payout of $2K and estimated payments made to the state by 3Q (Sep 15) of $1k. A total of about $3k. I have not made any estimated payment to the state for 4Q yet. Per my estimate I will owe an additional $17K (total of $20K) at the time of filling my 2025 return.

- Since I will end up paying $20K for 2025 state taxes and if I can take that "deduction" on my federal, I would be better of with itemizing my federal instead of taking standard deduction. I am 65+, retired and no other deduction, I estimate my standard deduction will be $17+K vs. $20K+ if I took itemized deduction.

- First, are my assumption above correct? and what do I need to do to be able to take that larger itemized fed deduction for 2025. Would it help if I made the remaining $17K payment to the state as estimated payment by the year end Dec 31 or by Jan 15?  

- Is there anything I can do to minimize my 2025 fed taxes in view of the $20K state tax liability for 2025?

Thanks again!

[xmasbaby0]

@JQ6 

Forget January 15.    You can only use state tax paid in 2025-----on or before December 31, 2025 --- as an itemized deduction on a 2025 federal tax return.

[VolvoGirl]

No you can't deduct the 17,000 tax due you will pay when you file your state return in 2026.  Only the 3,000 paid in 2025 and any estimated payment  you make by the end of December.    So if you want to pay the 17,000 as an estimated payment by Dec 31 that could help if it puts your itemized deductions over the Standard Deduction.  Sounds like you are Single?  Your Standard Deduction is $17,750.