Can California state income taxes paid be itemized on federal income tax return?

Question

I currently live in Washington state (no state income tax) and work a tech job. I am contacted by companies in California to work for them, but I am hesitant because of the state income tax in California (amongst other reasons).

For the sake of argument, let's say that I make $100,000 before taxes each year in my current Washington job and file as single for my federal income tax return. A California company offers me a job for $118,000 gross per year. Roughly speaking, even though it appears I receive a 18% nominal pay raise, I owe the state of California approximately 9% of my annual wages. So, in my view, the effective (i.e., relative to state with no income tax) pay increase is (118000 * (1.00 - 0.09)) - 100000 = 7,380 --> ~7% gross pay raise.

Are there any situations, including California workers who make more or less than my $118,000 hypothetical California annual income, where people deduct California state income taxes paid on their federal return (which reduces their federal Adjusted Gross Income)? If so, is the deduction dollar-for-dollar?

Answer 1

If your itemized deductions on Schedule A exceed the standard deduction, then you can itemize your deductions and deduct the actual amount. State taxes are included in the itemized deductions (though excluded from AMT, but at these levels of income that's irrelevant). Thus you can deduct your California State taxes from your Federal income.

It is not exactly dollar for dollar, since you have the standard deduction in any case, so essentially you only benefit from the excess of your State taxes over the standard deduction.

Keep in mind, when comparing California to Washington, that the State income tax is only one of many items which will make your life more expensive in California. Other items include significantly higher rents (at least at the tech-centric areas of SF Bay and LA-Orange County), higher sales taxes, higher gas prices, etc etc.

But its sunny most of the year so you've got that.

Answer 2

In addition to what littleadv mentioned, I want to point out that you can use as an itemized deduction either state income tax or state sales tax.

In a state without state income tax, like Washington, you would always choose to deduct state sales tax (although the state sales tax may not make your itemized deductions more than standard deductions, so it doesn't always matter).

In California, where the state income tax is so high, you would usually choose to deduct the state income tax, so you lose the opportunity to deduct any state sales tax (or, if you buy something so expensive that the sales tax is greater than the state income tax, you can deduct the state sales tax but then you lose the opportunity to deduct the state income tax). This is an issue that did not exist in Washington.