High-State-Tax Taxpayers May Still Want to Itemize

Many taxpayers who live or work in states with high state income taxes let out a collective groan of frustration upon learning they would be limited to a $10,000 state and local tax (SALT) deduction after 2018. But even though the SALT deduction limits the tax benefit of living in a high-tax state, taxpayers could still benefit from itemizing on their state income tax return.

What the SALT Deduction Includes

State and local taxes that are classified as SALT (and therefore limited to the $10,000 federal cap) include:

  • Real estate taxes (like property taxes)
  • Personal property taxes, including auto registration taxes (if the registration cost is based on the value of the car)
  • State income taxes
  • City, county, and/or parish taxes

The purpose of being able to deduct these tax payments is to avoid being double-taxed on the same income. Taxpayers who want to take advantage of this will need to itemize their federal taxes instead of taking the standard deduction.

But with the standard deduction now at $24,000 for a married couple, it doesn't make much sense to itemize at the federal level. if you pay $20,000 or more in state and local taxes each year, you will end up being double-taxed on about $10,000 of your income if you choose to itemize; meanwhile, by taking the standard deduction, you shield all $20,000 plus an additional $4,000.

Itemizing at the State Level Can Still Make Sense

But even if itemizing your federal income taxes will cost you, it often makes sense to keep itemizing your state income taxes. Many states base your taxable income on your federal AGI, so getting this number as low as possible by taking the standard deduction—then deducting any other state and local taxes you’ve paid—can reduce your tax bill.