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In that case I think you may be right - say, if our taxable income in California is $125K, our state taxes owed would be $11,625 (9.3%). Could that whole amount then be deducted on our federal return?

The amount of state income paid during the calendar year is the amount that is deducted on Schedule A. If you receive a refund, the amount of the refund that resulted in a tax deduction is declared as income the next year.

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