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March 6, 2015


Federal deduction for Texas sales tax: an update

Federal and state tax laws are often in alignment with each other on the basic structure of deductions, exemptions and so on.

But how does federal tax law take account of the fact that federal taxes may be affected by differences in state tax structure?

In Texas, this is a timely question of interest because of the absence of an income tax here. If people in other states get to deduct state income taxes when doing their federal returns, what about Texas taxpayers?

As we noted a little over a year ago, Congress has been reluctant to continue a deduction for state taxes in Texas and other states without an income tax. We wrote about this in our January 23 post last year.

Finally, last December, Congress came through with legislation that allows taxpayers in states that have no state income tax to itemize states sales taxes. This itemization can be done in place of deducting state and local income tax in the seven states that lack an income tax at the state level.

The legislation passed by Congress in December was part of a “tax extender” package that continued several other tax breaks.

If Congress had not passed the extender legislation, Texans would not have had the option to deduct state sales tax. This would have made federal taxes go up for those who were accustomed to using the deduction.

To be sure, not all taxpayers make use of this option. But its presence shows the rather intricate connection between state and federal tax law.

Source: Main St., “Why Certain Tax Deduction Are Not Allowed in These Four States,” Juliette Fairley, Mar., 4, 2015

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