IRC 164 : Deduction for State Income Tax Simplified

IRC 64

IRC 164 of the Internal Revenue Code provides for the itemized deduction for state income tax or local income tax. This post is going to simplify the law related to the itemized deduction of state and local income tax through five questions and answer. Each one will explain in simple words something about the deduction of income tax that you paid to state or local authorities.

What does IRC 164 say ?

The law under Section 164 of 26 US Code  provides for deduction of State & Local income tax paid by a taxpayer . The law is as under :

(a)General rule Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued:

(1)State and local, and foreign, real property taxes.
(2)State and local personal property taxes.
(3)State and local, and foreign, income, war profits, and excess profits taxes.
(4)The GST tax imposed on income distributions.

2.Where to Claim Itemized Deduction ?

It is claimed by filling out Schedule A of your tax return, say Form 1040 . As you know Schedule A is for claiming itemized deduction while computing taxable income.

3.What type of State & Local Tax Can I Claim ?

The rule is simple as per section 164 of IRC ( refer point one above) , that says following types taxes paid to state or local authorities are allowable

  • Withholding for state and local income taxes (shown on Form W-2 or Form 1099)
  • Estimated tax payments paid during the year
  • Extension tax payments paid during the year
  • Payments made during the year for taxes that arose in a previous year
  • Mandatory Contributions to State Benefit Funds

Most important point to note only tax paid is allowed deduction under IRC 64. So , even if some taxes which are due next year , say in January next year , if paid by December , can be claimed as itemized deduction .

4.How can I know how much I paid as state income or local income tax paid ?

There are various statements which are issued by authorities who deduct the tax. You can examine those statements to see if any deduction is shown there . Here are some documents for reference if you desire to know if tax was paid to State or Local authorities

  1. Wage & Tax Statements – Please examine box 14 to 19 of the Form W-2G – to find out the income tax withholding by state and local authorities
  2. Interest Income – if you earned interest income , please examine Form 1099-INT to see if any interest is deducted

Similarly , you may examine other Form 1099 series like Form 1099 G for any gambling winnings (Box 15 & Box 17)  or Form 1099 -D for any dividend income in box 14 or Form 1099-R if you earned income in form of pension, annuities plans , or IRAs etc . Check Box 12 & Box 15 ). Lastly , check Form 1099-MISC in  box 16 if there was any miscellaneous income earnings.

5.Any other Thing I should Know about IRC 164 ?

Yes, there are a few important aspect of claiming the state or local income tax as itemized deduction under IRC 164 . These are :

  1. Taxpayers who are impacted by the alternative minimum tax (AMT) likely should not tax plan by prepaying the state tax since state and local taxes are not deductible for AMT
  2. If you file tax return jointly, both husband & wife can claim their state or local tax irrespective of the fact how they paid those taxes i.e singly or jointly. This is quite different than in case of a married taxpayers who is filing tax return separately . In that case , he/she is allowed to claim only those taxes that was paid singly . taxes paid to state or local authorities , jointly will not be allowed.
  3. What if you & your spouse file state tax return jointly, but federal income tax separately ?  The answer is given by IRS in Publication 17 as under :

“If you and your spouse file joint state and local returns and separate federal returns,… you can deduct only the amount of the total taxes that is proportionate to your gross income compared to the combined gross income of you and your spouse…. You can avoid this calculation if you and your spouse are jointly and individually liable for the full amount of the state and local income taxes…. If so, you and your spouse can deduct on your separate federal returns the amount you each actually paid.”

Read the full provision of  IRC 164 of 26 US Code  






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