How is a payment of state income tax handled on a federal income tax return? Is it merely a deduction from federal taxable income, or is it a direct offset of Federal income tax?
by 
William Bateman
ANSWERS: 1
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The payment of state income taxes is a deduction for federal income tax purposes. Therefore, it is not a dollar-for-dollar, direct offset of the federal tax liability. Moreover, the state-tax deduction is what is known as a "below-the-line" deduction, meaning that it is an itemized deduction from adjusted gross income. Only taxpayers that forgo the standard deduction and choose to itemize their deductions are entitled to it (unlike "above-the-line" deductions from gross income, which all taxpayers can take). There are some other limitations to "below-the-line" deductions, but they are not particular to the state-tax deduction.
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