Federal deduction for state and local sales taxes, part 1

Some states have income taxes and some do not. And in states with income taxes, Congress allows taxpayers to deduct their state income tax payments from their federal taxes.

But in an effort to have equitable treatment between income-tax states and those with no income tax, Congress has historically allowed taxpayers in states without an income tax to deduct state and local taxes instead.

In this two-part post, we will take note of the fact that this may be about to change. If it does, it would negatively affect taxpayers in Texas and the other states that do not have income taxes.

The reason for the likely change is, in one sense, not really a reason at all. The U.S. Congress was fraught with even more tension than usual last year. This was reflected, most prominently, in the 16-day government shutdown in October.

It was also reflected in the failure to act on key proposals. For example, the Senate passed a comprehensive immigration reform bill last year, but the House of Representatives did not act on it.

The failure to pass immigration reform received a lot of attention because it is one of President Obama’s key second-term priorities. But Congress also failed to act in other ways, and one of those was the failure to renew the federal tax deduction for state and local sales taxes paid by taxpayers who live Texas and other states without an income tax.

The deduction is still in place for 2013 federal income taxes. But Congress will need to act in order to restore it beyond this year. In part two of this post, we will discuss the prospects of this.

Source: Star-Telegram, “Tax time may soon be more costly for Texans,” Anna M. Tinsley, Jan. 4, 2014