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This is probably a silly question, in that I'm missing something obvious, but I'm trying to estimate my 2002 federal and state taxes, and I'm having a problem. I'll be itemizing both, and state taxes are deductible on a federal return, while federal taxes are deductible on my state return.

So I need to know how much I'll owe in federal taxes to estimate my state taxes, but in order to estimate my state taxes, I need to know how much I'll owe in federal taxes. I never ran into this before, because New York has a high enough standard deduction that I didn't have to worry about itemizing until I bought a condo this year.

As I said, I think I'm missing something obvious here, but right now, all I can think of doing is pretending I take the standard deduction for both, figure out what that gives me in taxes, recalculate taxes based on that amount, and continue until both numbers stay constant. That seems both tedious and prone to error, so I was hoping someone else would be able to suggest a better way to do things.

Thanks.
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I think you must misunderstand the NY itemized deduction. Your state taxes are a deduction if you itemize on your federal return, but I've never heard of federal taxes being deductible on a state return. I had a quick look at the NY form, and it looks like the NY itemized deduction is more or less the same as it is in other states: you start with the federal deduction, then subtract state taxes included. That is, the NY deduction consists of all the federal deductions except for state income tax. Ok, I'm not a NY resident - but where in your form do you see anything about taking a state deduction for federal taxes?
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<Slapping forehead> You're absolutely right; I went back and reread the forms, and the reason state tax is mentioned is because they want to make sure you subtract that from your federal deductions when itemizing state deductions.

Thank you; things make much more sense now.
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I've never heard of federal taxes being deductible on a state return.

I'm told Colorado allowed this deduction at one time, and I'm pretty sure Iowa does today.

Phil Marti
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lorenzo2 sez: I've never heard of federal taxes being deductible on a state return.

pmarti replies: I'm told Colorado allowed this deduction at one time, and I'm pretty sure Iowa does today.


Well, so it does. I just had a look at the Iowa form, which has a few other interesting items:

- Chickadee Checkoff, a contribution to a state Fish and Wildlife fund;

- Corndog Checkoff, a contribution to help fund capital improvements to the State Fairgrounds, where I guess they sell a lot of corndogs.

They also allow a deduction for your auto registration fee, calculated as follows: deduction = fee - (weight of car)/250. If it's a pickup truck full of corndogs, you may get no deduction at all.
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I've never heard of federal taxes being deductible on a state return.

Oregon has allowed this at least as long as I have lived in the state--since 1980. They do have a cap on how much federal taxes can be used as a "subtraction" on the state return, which has changed a couple of times now.
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I'm told Colorado allowed this deduction at one time, and I'm pretty sure Iowa does today.


Huh. OK, then while it's no longer that important to me, I'm curious: how are you expected to do this, without running into the catch-22 I described earlier?
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Huh. OK, then while it's no longer that important to me, I'm curious: how are you expected to do this, without running into the catch-22 I described earlier?

Arizona was/is one more state in that category. IIRC, they instruct you to complete your Federal return first. Since state taxes on that return are almost always on a cash basis (deduct the state taxes actually paid during the year) you can do that without completing the state return. Then complete your state return, using your actual Federal tax as the deduction.

But that was Arizona, and a few years ago. I don't know about any of the other states that have been mentioned.

--Peter
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Huh. OK, then while it's no longer that important to me, I'm curious: how are you expected to do this, without running into the catch-22 I described earlier?

This is how it works in Oregon:

Federal income taxes:

Next month, when I work on my Year 2001 income tax returns, what I can itemize on Schedule A are state income taxes I actually paid during calendar year 2001. The Oregon state taxes I paid in 2001 are the state taxes that were withheld from my paycheck, plus the money I had to send in with my 2000 Oregon State tax returns I filed in February 2001. (The flip side of itemizing state income tax is that any refund I get from the state the following year counts as that following year's income.)

So I can always figure out my federal returns before I even begin with my state returns. In fact, the Oregon State Form 40 instructions specifically say to figure out federal taxes first.

Oregon State income taxes:

What Oregon state allows me to deduct on my Year 2001 State Income Tax Return is my federal tax obligation for Year 2001. I don't have Year 2001 Form 1040 in front of me, but on the Year 2000 Form 1040, this is line 57 "This is your total tax". So I can use this "total tax", up to a limit (last year up to $3,000, a recent ballot measure raised the limit), as a "subtraction" (deduction) on my Oregon state tax forms.

(Watch out if you aren't in Oregon--it doesn't make sense to me that we use the "total tax" instead of the federal taxes actually paid, but then what do you expect from state legislatures that usually meet just every other year?)

Fortunately, most of my income is from salary so my W-4 filings with my employer gets the withholding close enough, and then for the next 20 years it has been just minor tweaking from year to year in the "additional tax to withhold" box to get my tax returns to come out pretty close.
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Huh. OK, then while it's no longer that important to me, I'm curious: how are you expected to do this, without running into the catch-22 I described earlier?


Back in the olden days when I was in my CPA practice and doing tax returns for companies who were active in many states, we had to use the trial and error method. As you say, first compute the federal with no state tax deductions, then plug those numbers in. It shouldn't take more than 3 rounds to zero in on the correct figures. Of course in the precomputer days with 15 to 20 states it was not an easy chore. You can be sure we tried to take every precaution that there would be no changes to income before we started the exercise. <g>

Rip
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