Do I deduct last year's state taxes or this year's?

Question

The instructions for IRS Schedule A are not clear. On one hand it says the amount of state taxes I paid can be found on my 2016 W2, but on the other it seems to say to deduct taxes "paid in 2016" which were incurred in 2015.

So, do I deduct the taxes I PAID in 2016 which I incurred in 2015, or do I deduct the taxes I will be paying in 2017 which were incurred in 2016?

A close reading of the instructions suggests that what I am supposed to deduct is (A) the amount WITHHELD during 2016 PLUS (B) any cash paid in 2015 (but NOT withheld in 2015). In other words, what the instructions appear to be saying is...

Lets say I had $5000 withheld in 2015 and ended up owing $5250, so I paid $250 in 2016, then I had $6000 withheld in 2016. Then my total deduction would be the $6000 withheld in in 2016 PLUS the $250 paid for 2015 taxes, for a total of $6250 on my 2016 Schedule A. Is that right?

Same question for real estate taxes.

Answer 1

For your 2016 return -

You claim the state refund as income. The state refund of 2015 taxes you overpaid and got back based on the 2015 return you filed by April 2016.

On the 2016 return you are working on, you deduct state income tax that was withheld from your pay checks during 2016 (as reported on your 2016 W-2 forms) plus any state estimated income tax payments made during 2016 (one of these might have been the 4th installment of state income tax which was due in mid-January 2016) plus any state income tax payments for 2015 that you sent in with your state income tax return plus any state income tax withheld from IRA distributions, pension payments etc (and reported on Forms 1099-DIV, 1099-R). You also deduct (on a separate line on Schedule A) real estate taxes on your home that you paid in calendar 2016 even if the property tax was for a previous year (in most jurisdictions, real estate taxes that you paid in 2016 were for ownership of the property in 2015).

Answer 2

When it comes to deducting state and local taxes on your federal income taxes, the rule is simple: you deduct taxes in the year that you pay them. It goes by the calendar year.

During 2016, you had state income taxes that you paid out of your paycheck. Those are deductible on your 2016 federal tax return if you itemize your deductions. On your 2015 state return (which you sent in during 2016), you may have had to send in some tax to your state. Because it was paid during 2016, this is also deductible on your 2016 return.

For your example:

Lets say I had $5000 withheld in 2015 and ended up owing $5250, so I paid $250 in 2016, then I had $6000 withheld in 2016. Then my total deduction would be the $6000 withheld in in 2016 PLUS the $250 paid for 2015 taxes, for a total of $6250 on my 2016 Schedule A. Is that right?

Yes, that is correct. You paid $6250 in total state income tax during the 2016 calendar year, so this is the amount you would deduct on your 2016 federal return. (If you had paid any other state income taxes during 2016, such as estimated payments or withholdings of some other kind, you would also deduct those amounts as well.)

For real estate taxes, it depends on when you paid it. For example, my property tax is due on January 31 every year. I paid the tax before December 31, 2016, so I get to deduct it on my 2016 federal return. If I had waited until January 2017 to pay it, I would have to wait to deduct it until I did my 2017 federal tax return.

When it comes to the refund, you only add that as income if you had previously deducted the withholdings that the refund is based on. If you are required to add it as income, you put it on the return for the year that you received the refund check in. See "Are tax federal or state tax refunds taxable in the next tax year?" for more information.