Itemizing on State and Federal Income Tax Returns: It's (Now More) Complicated

Brief

Itemizing on State and Federal Income Tax Returns: It's (Now More) Complicated

December 2, 2020

Abstract

A taxpayer’s decision to itemize deductions or to claim the standard deduction on their income tax return is often framed as a simple calculation: Claim the greater of the two so as to minimize tax liability. But in states that require taxpayers to use the same status on their state income tax return as on their federal return, this general rule can produce conflicting results if taxpayers examine liability separately on their federal and state returns. Itemized deductions might be greater than the standard deduction on a state income tax return, but the reverse could be true on a federal return. Recent federal law changes have further complicated the choice. When the federal standard deduction was nearly doubled beginning in 2018, many more taxpayers found a conflict between the best itemization scenario on federal and state income tax returns. Those taxpayers must now calculate their federal and state income taxes under both scenarios if they want to minimize their combined state and federal income tax liability. Many taxpayers in states that link federal and state itemization choices are affected. In Maryland, for example, more than 200,000 taxpayers could benefit by itemizing on their federal returns when that may not be the obvious choice.  In this brief, I examine the links between federal and state itemization decisions and explore the implications of relaxing state rules requiring that state itemization choices match federal ones.

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