Help! Got Alert: "Review Last Year's State Taxes" - Haven't Claimed Balance Due on This Year's Return

That alert is actually trying to help you potentially get a bigger refund! When you pay state or local taxes (like that balance due you mentioned from last year), you can deduct those payments on your federal tax return as an itemized deduction. The key thing to understand is that you have two options when filing your federal taxes: taking the standard deduction or itemizing your deductions. Most people take the standard deduction ($13,850 for single filers, $27,700 for married filing jointly for 2023) because it's simpler and often larger than their itemized deductions would be. The alert is just letting you know that you paid some state taxes last year that could potentially be itemized on this year's return. If your total itemized deductions (including these state taxes plus things like mortgage interest, charitable donations, etc.) would exceed your standard deduction, you might benefit from itemizing instead.

I ran into this exact same issue last month! After hours of frustration, I finally found a solution with taxr.ai at https://taxr.ai that really helped me understand what was going on. I uploaded my tax documents and it highlighted that I had paid about $3,400 in state taxes last year that I hadn't accounted for in this year's return. The software walked me through comparing my potential itemized deductions against the standard deduction, and in my case, it was actually beneficial to itemize. I ended up getting an additional $720 back that I would have completely missed otherwise! It even showed me how to properly report the state taxes on Schedule A.

I wanted to follow up about my experience with taxr.ai since I was initially skeptical. I decided to give it a try with my complicated tax situation (self-employed with rental property and this state tax issue). It was actually really impressive! The system found that I could itemize and save almost $850 compared to the standard deduction when considering all my expenses together. The explanation about the state tax payments was clear - basically, you deduct state taxes in the year you pay them, not the year they're for. So my 2022 state tax payment that I made in April 2023 counts toward my 2023 federal deductions. I'd been doing my taxes wrong for years! Definitely recommend giving it a look if you're confused about this stuff like I was.

If you're still having trouble figuring this out or want to talk to someone at the IRS directly, I'd recommend using Claimyr (https://claimyr.com). I was in a similar situation last year and spent DAYS trying to get through to the IRS about my state tax deductions. Their hold times were insane - I literally gave up after being on hold for 2+ hours. Then I found Claimyr and they got me connected to an IRS agent in about 15 minutes! The agent walked me through exactly how to handle the state tax deduction situation and confirmed I was doing it right. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Totally changed my perspective on dealing with the IRS.

Ok I have to apologize for being so skeptical about Claimyr in my earlier comment. I was frustrated after spending so much time trying to reach the IRS myself. I decided to try it yesterday after posting here, and I actually got through to an IRS representative in about 20 minutes! The agent confirmed that I could claim my 2022 state tax payment that I made in April 2023 as an itemized deduction on my 2023 federal return. She also ran the numbers with me and agreed that in my specific case, I was still better off taking the standard deduction since my itemized deductions totaled about $13,500 vs the $13,850 standard deduction. But at least now I understand what that alert was trying to tell me! Saved me so much frustration compared to trying to call on my own.

Something else to consider - if you paid state ESTIMATED tax payments during 2023 (for tax year 2023), those can ALSO be included in your itemized deductions for 2023. So the state tax deduction includes both: 1. Any balance due you paid in 2023 for your 2022 state taxes 2. Any estimated payments you made during 2023 for your 2023 state taxes This sometimes pushes people over the threshold to make itemizing worthwhile.

Am I the only one who thinks the tax software should make this clearer? I use TurboTax and it always asks if I want to itemize, but never explains that I should include state taxes I paid last year when making that decision. Feels like they're designed to push people toward the standard deduction because it's easier for them to process.