Are Federal Income Taxes Deductible?

All U.S. taxpayers who itemize their deductions are eligible to deduct the state taxes they've paid from their federal taxable income. Only a handful of states, however, go the other way and allow taxpayers to take a state deduction for federal income taxes they have paid. In addition, some of those states limit the deduction.

States

As of the 2010 tax year, according to the Tax Foundation, a nonpartisan tax-policy research group, six states allowed some form of deduction for federal taxes on their state income tax returns. Those states were Alabama, Iowa, Louisiana, Missouri, Montana and Oregon. The foundation said in a 2010 report that several states had eliminated "federal deductibility" in the preceding 20 years. Another group, Citizens for Tax Justice, had counted nine states with federal deductibility in 2000; in the ensuing 10 years, North Dakota, Oklahoma and Utah did away with it.

Rules

All six states allow taxpayers to deduct federal income taxes. That includes the alternative minimum tax, or AMT, a federal surtax originally intended to prevent income tax evasion by higher-income people. All the states prohibit taxpayers from deducting "self-employment taxes," which are the Social Security and Medicare taxes paid by self-employed people. Some of the states base the allowable deduction on the amount of a taxpayer's federal tax liability --- that is, the amount the person was actually required to pay in taxes, regardless of how much that person actually paid through withholding or estimated tax payments. Others base the deduction on the amount taxpayers actually paid, regardless of their tax liability.

Details

Alabama and Louisiana allow taxpayers to deduct the full amount of their federal tax liability. Iowa allows taxpayers to deduct the amount of their federal tax payments, minus any federal tax refund received during the year. As of March 2011, Missouri bases the deduction on taxpayer federal liability, but it caps the deduction at $5,000 for single taxpayers and $10,000 for married couples filing jointly. Montana allows taxpayers to deduct their federal tax payments --- but only if they itemize their deductions, and the deduction is limited to $5,000 for single taxpayers, $10,000 for married couples. Oregon allows taxpayers to deduct their federal tax liability up to $5,850.

Issues

Supporters of federal deductibility say it keeps people from having to pay state taxes on income that went to pay federal taxes; in other words, it avoids taxing the same money twice. But critics of the idea say states without federal deductibility take federal taxes into account when setting their own tax rates, producing the same revenue without complicating the tax-filing process. Federal deductibility directly ties state revenue to federal tax policy, which is one reason why so few states have it. When federal taxes go up, taxpayers in those states report less taxable income, which reduce state revenue.

References

• Tax Foundation; How Would Expiration of Bush-Era Tax Cuts Affect State and Local Budgets?; Mark Robyn; November 2010
• Citizens for Tax Justice; State Deduction for Federal Taxes; September 2000
• "The Des Moines Register"; Tax Group Says Iowans Want Federal Deductibility; Bill Petroski; January 2010

Resources

• Alabama Department of Revenue; Form 40 Instructions; 2010
• Iowa Department of Revenue; Form IA 1040; 2010
• Louisiana Department of Revenue; Form IT 540 Instructions; 2010
• Missouri Department of Revenue; Form MO 1040 Instructions; 2010
• Montana Department of Revenue; Form 2 Instructions; 2010
• Oregon Department of Revenue; Form 40 Instructions; 2010