IRS Issues Guidance on State Tax Payments to Help Taxpayers
The Internal Revenue Service (IRS) has issued guidance to help taxpayers understand the deductibility of state and local tax payments for federal income tax purposes. The guidance addresses the deductibility of state and local tax payments made in exchange for a state or local tax credit.
Under the guidance, taxpayers who make payments to state or local governments in exchange for a credit against state or local taxes owed can generally deduct the payments as state and local taxes on their federal income tax returns. However, taxpayers must reduce their state and local tax deduction by the amount of any credit they receive for making the payment.
The guidance also provides examples of how to apply the deduction rules in different situations. For example, it explains how to calculate the deduction when a taxpayer receives a state or local tax credit for making a charitable contribution.
This guidance is particularly important in light of recent changes to the federal tax code that limit the deductibility of state and local taxes. The Tax Cuts and Jobs Act of 2017 limited the state and local tax deduction to $10,000 per year for individuals and married couples filing jointly. This limitation has resulted in higher federal tax bills for many taxpayers in high-tax states.
By providing guidance on the deductibility of state and local tax payments, the IRS is helping taxpayers understand how to minimize their federal tax liability. Taxpayers should consult with a tax professional to determine how this guidance applies to their individual tax situation.
Conclusion
In conclusion, the Internal Revenue Service (IRS) has issued guidance to help taxpayers understand the deductibility of state and local tax payments for federal income tax purposes. The guidance clarifies the deductibility of state and local tax payments made in exchange for a state or local tax credit and provides examples of how to apply the deduction rules in different situations. This guidance is particularly important in light of recent changes to the federal tax code that limit the deductibility of state and local taxes. Taxpayers should consult with a tax professional to determine how this guidance applies to their individual tax situation.