I'm trying to spread the word that when itemizing your deductions, TurboTax should take another step when recommending the state income tax deduction. Currently, it appears that TurboTax automatically recommends users to take the largest deduction out of the two (state income tax OR state sales tax). Of course everyone would want to take the largest deduction, but there are situations where you wouldn't want to. For example, if you already pay $9,000 in property taxes, you're already limited to an additional $1,000 state income OR sales tax deduction to meet the maximum of $10,000 allowed in the "Taxes You Paid" section of Schedule A (Form 1040). In this same example, even though you may have state income taxes of $12,000, you're only limited to $1,000 more due to the $10,000 maximum allowed tax deduction. If the state sales tax deduction is at least $1,000 or more, you're in the SAME situation with a $10,000 tax deduction on your Schedule A. The difference here is that if you receive a state income tax refund in the same year, the entire refund (up to the $1,000 state INCOME tax deduction) is taxable in the next year. Instead, if you elect to choose the $1,000 in state SALES tax, NONE of your state tax refund will be taxable.
Again, the point I'm making here is that TurboTax doesn't appear to take this into consideration and it is up to the users to understand to manually elect the state SALES tax deduction ONLY if it works for you.
