If your municipality charges a local services tax (LST), you may be wondering if the amount from your W-2 box 14 LST category can be deducted on your federal income taxes. Generally, this tax isn't deductible. If you worked in a municipality that charges an LST during the most recent tax year, you'll need to know how to handle this tax matter when you file your upcoming federal tax return. Take a look at what you need to know about the LST tax category.
Local Services Tax Is Not the Same as Local Income Tax
In some towns and cities around the country, local governments impose local income taxes. These taxes come in addition to the state and federal taxes that people pay. They can be charged to people who live and work in a town or city.
The revenue generated from these taxes is used to fund everything from trash collection to town parks. However, a local services tax (LST) is a special fee that is charged specifically to people who work in a town or city. While these two taxes often fund many of the same programs, they are not interchangeable.
The Basics of the LST Tax Category
Some cities, towns, boroughs, villages and counties assess local service taxes to pay for certain services or infrastructure needs. This is a separate bill from something like an income tax or property tax. Here's a look at some common reasons for LSTs:
- Trash collection.
- Road maintenance.
- Infrastructure maintenance.
- Building maintenance.
- Streetlights.
- Tree trimming.
- Sewer maintenance.
The first step is to determine if you're subject to an LST based on where you work. LSTs may apply to all individuals who work within the taxing jurisdiction that is imposing the LST. The rationale is that the person who is earning income within a jurisdiction is utilizing local services while generating revenue.
Who Has to Pay a Local Services Tax?
The tax applies to employed and self-employed people. If you receive a salary or wages from an employer, the LST that applies in your job's jurisdiction will likely be withheld by your employer via your W-2 box 14 LST category. If you are self-employed, you may need to make quarterly payments. However, LSTs are typically low enough that lump payments are accepted by local jurisdictions.
LSTs are prorated. This means that an employee is only required to pay the tax during the period that covers their employment in a particular jurisdiction. If you only work in a jurisdiction for three months in one year, you are only responsible for a prorated amount covering those three months instead of the entire calendar year.
In some cases, employees who earn below a certain threshold are exempt from LSTs if LSTs exceed a particular dollar amount. There are also exemptions for LSTs in place for veterans and active-duty service members.
Is the LST Deductible on a Federal Return?
No, an LST is not considered a deductible local income tax using your W-2 box 14 LST category when you're filing your federal return. There is some confusion about whether or not you can deduct local service taxes due to the fact that they previously were deductible under the former tax code when they were claimed as “unreimbursed business expenses.”
Using that deduction, taxpayers were able to deduct LSTs with a limit of 2 percent. However, that went away with the introduction of 2017's tax reforms. The 2017 tax reforms prevent taxpayers from claiming “unreimbursed business expenses" on their federal returns.
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Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.