Falling behind on your tax payments or getting a letter from a tax agency saying you owe extra is never fun. Depending on the type of tax owed, you could end up making some lemonade from the lemons by taking advantage of an additional tax deduction on your federal tax return for state and local income taxes paid during the tax year, including back taxes. However, the deduction for state and local taxes is an itemized deduction, which means you can only claim the deduction if you give up your standard deduction.
TL;DR (Too Long; Didn't Read)
State and local taxes paid during the current tax year can be deducted from your federal income tax return if you itemize.
Back Taxes Deductible in Year Paid
The IRS allows an itemized deduction for state and local income taxes accrued and paid during the current year. That means that you’re allowed to take a deduction for state and local taxes in the year that the taxes are both owed and paid, even if it’s paid late. For example, if you pay your 2016 state taxes during the 2017 calendar year, you can deduct those payments on your 2017 tax return. However, you aren’t allowed to deduct any interest or penalties on your state and local taxes. For example, if you pay $5,000 to your state because of missed taxes during the current tax year, but $1,500 is due to interest and penalties, you’re only allowed to deduct $3,500 on your federal tax return.
Federal Taxes Not Deductible
You are not allowed to deduct federal taxes on your income tax, regardless of the year that you pay them. For example, if you fell behind on your taxes and paid two years’ worth of federal income taxes in one year, you can’t claim an additional deduction on your taxes.
SALT Tax Deduction Limited in 2018
Beginning in the 2018 tax year, the deduction for state and local taxes is capped at $10,000 per year. For example, if you paid $7,000 in state and local income taxes and $4,000 in state real estate taxes, you’re limited to only deducting the first $10,000 under the SALT tax deduction. If you’re married but opt to file separate returns, the limit is cut to just $5,000 of state and local taxes.
No Limits for 2017 Tax Returns
For the 2017 tax year, there is no limit on the SALT deduction, so you’re not limited to the amount of state income tax deduction you can take on your tax return. For example, if you pay $7,000 in state and local income taxes and $4,000 in state real estate taxes plus an additional $5,000 in state back income taxes during the 2017 tax year, you can deduct the entire $16,000 on your taxes.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."