Will You Be Able to Continue to Deduct Ohio Income Taxes from Your Federal Taxes?

The new tax reform, signed into law by President Trump on December 22, 2017, brought sweeping changes to the current tax code. One of the biggest changes is the cap on state and local taxes (SALT) and the nearly doubling of the standard deduction taking effect for taxes you will file next year for 2018. This has left some Ohio taxpayers wondering whether you can still deduct Ohio income taxes from your federal taxes. The short answer is that, although you can deduct some state and local tax payments, most Ohioans probably won't.

For the majority of taxpayers, who claim the standard deduction normally, the new changes will have minimal effect. Most taxpayers do not itemize, and, therefore, they do not take the deduction for state and local taxes now. According to the Tax Policy Center, only 30 percent (44 million) of taxpayers itemized in 2014, down from a high of 36 percent in 2005. And, the IRS expects millions more to stop itemizing and claim the standard deduction under the new tax reform. The chances of you needing to comb through and organize that box of receipts at the end of the year is drastically decreasing.

The $10,000 Cap on State, Sales, and Property Taxes

Currently, for 2017, if you claim the itemized deduction, you can deduct either the higher of the state income tax or sales tax and property taxes. For 2018, this does not change. If you continue to itemize, you will be able to continue to deduct Ohio income taxes from your federal taxes. However, the big difference for 2018 is the state income, sales, and property tax deductions will be subject to a $10,000 cap, and you still will have to select to take either the state income or sales tax deduction. Also, the $10,000 cap applies per return, not per taxpayer, so a married couple filing separately would only be able to deduct $5,000 each, not $10,000 each.

With the nearly doubling of the standard deduction from $6,350 to $12,000 for single filers, $12,700 to $24,000 for married filing jointly filers, and $9,350 to $18,000 for head of household filers, millions more taxpayers will stop itemizing and take the standard deduction. The three most claimed deductions are state and local income taxes, charitable contributions, and home mortgage interest. For example, if for 2017, a married couple claimed itemized deductions of $10,000 for state income taxes, $10,000 for property taxes, and $5,000 in charitable contributions for a total of $25,000, it would give them a $12,300 higher deduction over taking the standard deduction of $12,700 ($25,000 - $12,700). If the same circumstances apply for 2018, the cap of $10,000 would apply to the state income, sales, and property taxes. The couple’s itemized deduction would be reduced to $15,000 ($10,000 for state income and property taxes + $5,000 charitable donations). With the cap in place, it would be much better for the couple to take the standard deduction for 2018, as it would give them a $9,000 higher deduction ($24,000 standard deduction - $15,000 itemized deduction).

Prepaying 2018 Property Taxes for a 2017 Tax Deduction

With many taxpayers realizing they would not need to itemize their deductions in 2018, they rushed to pay their 2018 property taxes that had already been billed in 2017, so they could receive credit when they filed their 2017 return. The IRS stipulates they will only allow people to receive credit for prepaying their 2018 taxes if the tax had already been assessed by the local tax assessor’s office in 2017.

People Most Affected by the $10,000 Cap on Property Taxes in Ohio

According to Cleveland.com, the areas affected the hardest in Ohio by the $10,000 cap will be high-income areas outside of Cleveland and Cincinnati where families pay higher amounts in state income, sales, and property taxes. The cap on state and local taxes will affect negatively higher wage earners living in states with higher property taxes more. Even though state and local income taxes is one of the most claimed deductions, Cleveland.com reports only 26% of people from Ohio claimed the deduction last year. Even if the cap wasn’t put into place in 2018, the higher standard deduction will be better for millions more Ohioans. For example, a single filer itemizing deductions of $3,000 property taxes, $4,000 state income taxes, and $3,000 charitable donations would have a slightly better deduction than the standard deduction in 2017 ($10,000 total itemized deductions - $9,350 standard deduction = $650 better deduction). However, for 2018, using the same deductions above, it would be better for them to take the increased standard deduction of $12,000, as it would net them a $2,000 better deduction than itemizing. (Their deduction for state and local taxes was already below the $10,000 cap.)

Will you be able to continue to deduct Ohio income taxes from your federal taxes? Yes. Will you need to? It will depend on your individual tax situation, but you will only need to deduct them if you itemize your deductions and have enough deductions to add up to an amount above your qualifying standard deduction.

If you are still confused about the effect these changes will have on your 2017 and 2018 taxes, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.