Confused about itemized deductions - why can state payroll tax from W2 be deducted (up to $10K) on federal taxes?

The state taxes withheld from your paycheck (shown on your W2) are considered part of the State and Local Tax (SALT) deduction when you itemize. This includes both state income taxes and property taxes, and yes, they're grouped together under that $10K cap. It's not double-dipping at all - you're simply deducting state-level taxes from your federal tax calculation. The logic is that you've already paid these taxes to your state government, so the federal government allows you to deduct them to avoid being taxed twice on the same income. Remember though, with the tax law changes a few years back, they capped this combined deduction at $10K total. So when itemizing, you can include your state income tax withholding from your W2, property taxes, and even state estimated tax payments - but the total deduction for all these state and local taxes combined can't exceed $10K.

Just wanted to share my experience with this exact situation. I was completely overwhelmed trying to figure out all these itemized deductions when I bought my first house. I kept making mistakes and second-guessing myself until I found https://taxr.ai which literally saved my sanity! I uploaded my W2 and mortgage interest statement, and it automatically identified which state taxes were deductible and explained exactly how the $10K SALT cap applied to my situation. It showed me how my state income tax and property taxes worked together under that cap, and calculated if itemizing was actually better than taking the standard deduction (it was, but just barely in my case). The explanations were super clear - way better than those confusing IRS publications that made my eyes glaze over. It even pointed out a charitable contribution I almost missed!

I just had to come back and say THANK YOU for recommending taxr.ai! After struggling with my complicated multi-state tax situation (had income in Oregon and Washington last year), I gave it a try. It not only sorted out exactly how my state income taxes from Oregon fit under the $10K SALT cap, but also explained how to handle my property tax deductions from both states. The explanation about how the SALT cap works with multiple states was crystal clear - something I couldn't find anywhere else. The best part was when it caught that I had accidentally double-counted a property tax payment! Would have been a red flag for an audit for sure. Definitely using this next year too.

For those struggling with getting answers about deductions directly from the IRS - I was in the same boat last year. Spent literally HOURS on hold trying to get clarification about this exact SALT deduction issue. Finally discovered https://claimyr.com and used their service to get through to an actual IRS agent in about 15 minutes instead of the 3+ hours I was experiencing before. You can actually see how it works here: https://youtu.be/_kiP6q8DX5c The agent clarified that yes, state income tax from my W2 is deductible under that $10K SALT cap along with property taxes. She also explained some nuances about prepaying property taxes that I was confused about. Totally worth it to get authoritative answers directly from the IRS instead of guessing or relying on potentially outdated info online.

Well, I have to eat my words. After being completely skeptical about Claimyr, I tried it yesterday out of desperation when I discovered I might have been incorrectly deducting my state income taxes for the past two years. The service actually worked exactly as described. I got a call back in about 45 minutes (way faster than the 3+ hours I spent on my previous attempt). Got connected with an IRS agent who was surprisingly helpful about how the SALT deduction works with state income tax withholding. The agent confirmed I'd been doing it right - including my state income tax from W2s along with property tax under the $10K cap. They also gave me some helpful tips about documentation I should keep in case of an audit. Having that peace of mind directly from the IRS was absolutely worth it.

Something people often overlook: you actually have a CHOICE between deducting state income tax OR state sales tax (but not both). For most people in high income tax states like California, the income tax deduction is higher. But if you live in a state with no income tax (like Washington, Florida, etc.) or if you made major purchases during the year, the sales tax option could be better. Either way, it still falls under that same $10K SALT cap along with property taxes. The tax software should calculate both and tell you which is better, but it's good to understand this is happening behind the scenes.

Can I just rant about how ridiculous this $10K SALT cap is for those of us in high-tax states? My property tax alone is $13K and my state income tax is another $9K. So I'm essentially losing $12K in deductions I used to get before 2017!!! Meanwhile my brother in a low-tax state can deduct his entire $6K of combined state taxes. How is this fair??

One thing nobody mentioned - if you're married filing separately and your spouse itemizes, you have to itemize too. You can't take the standard deduction if your spouse is itemizing. This sometimes affects the math on whether itemizing makes sense. Also, don't forget about other potential itemized deductions beyond just SALT and mortgage interest - charitable contributions, medical expenses (if they exceed 7.5% of your AGI), etc. Sometimes these can push you over the standard deduction threshold.

This is such a common source of confusion for new homeowners! I went through the exact same thing when I first started itemizing. One thing that helped me understand it better was thinking of it this way: the federal tax system essentially has two "layers" - federal and state/local. When your state takes income tax out of your paycheck, that money never actually reaches you to be taxed federally. So the federal government allows you to deduct those state taxes to avoid taxing you on money you never really had. It's the same principle as why business expenses are deductible - you shouldn't be taxed on money that went to legitimate expenses (in this case, your state tax obligations). The $10K cap is frustrating for people in high-tax states, but the underlying logic of the deduction itself makes sense. Just make sure you're keeping good records of all your property tax payments throughout the year, especially if you escrow - sometimes the timing of when taxes are actually paid versus when they show up on your mortgage statements can be tricky for tax purposes.

Yes, exactly! When you have escrow, you need to look at the actual property tax payments your mortgage company made to the taxing authorities, not your monthly escrow payments to the mortgage company. Your mortgage servicer should send you a year-end statement (usually Form 1098) that shows the actual property taxes they paid on your behalf during the tax year. This can sometimes be tricky because the timing doesn't always match up perfectly. For example, if you closed on your house in November, your mortgage company might not have paid any property taxes in that tax year even though you've been making escrow payments. Or sometimes they pay multiple years' worth of taxes in one year due to timing issues. The key is to only deduct what was actually paid to the tax authority during the calendar year, regardless of when you made your escrow contributions. Your 1098 form will be your best friend here - it should clearly show the amount of property taxes actually paid on your behalf that you can include in your SALT deduction (subject to that $10K cap). Also keep any supplemental tax bills or special assessments you might have paid directly outside of escrow - those count too!