Can I Deduct State Taxes Before I Do My State Return?

Hello everyone! I’m going to be itemizing my 2024 tax return for the first time next spring and I’m confused about how to handle deducting state income tax on my federal taxes.

I have Colorado state income tax withheld from each paycheck, but I usually get a good-sized refund with my state return. So, when I’m deducting state taxes on my federal return, do I need to complete my state return first? Or can I just use the amount withheld on my W2?

Sorry if this is a basic question! I searched around but couldn’t find a clear answer.

You’ll report the amount you had withheld, as shown on your W2.

Once you file your Colorado return and get a refund, the state will send you a 1099-G listing the refund amount. If that refund reduced your federal taxable income for 2024, then it’ll have to be added back as income on your 2025 taxes since you actually got the money in 2025.

This process prevents you from having to complete your state return first to figure out your federal deduction and also stops people from overstating deductions to avoid taxes.

With the $10,000 cap on state and local tax deductions (SALT), here’s how it works: If your SALT deductions are $11,000 and you got a $900 refund from Colorado, the refund isn’t taxable because it was over the cap. But if your SALT deductions were $9,900, then that $900 refund would be taxable in 2025 since it was used to reduce your 2024 taxable income.

Hope that clears things up!

@Khai
This is super helpful, thanks so much!

@Khai
Just adding that income from a refund only counts if it pushed your itemized deductions past the standard deduction.

@Khai
> If your SALT deductions were $9,900 and you got a $900 refund, does that mean only $100 is taxable since the rest didn’t benefit the taxpayer?

Ellington said:
@Khai
> If your SALT deductions were $9,900 and you got a $900 refund, does that mean only $100 is taxable since the rest didn’t benefit the taxpayer?

Nope! Since the $900 raised your itemized deduction and reduced your taxable income, the entire refund is taxable. If the OP had done the state return first, they would’ve found only $9,000 in SALT deductions allowed, so the refund would reduce that amount.

For example, if SALT deductions hit $10,500 but only $10,000 can be itemized, and then a $900 refund comes in, only $500 of that refund is non-taxable (as it’s above the cap), leaving $400 as taxable income.

@Khai
Got it, I was misreading. Thought you meant $9,900 SALT before refund.

> Or can I just use the amount withheld on my W2?

I think /u/fitzpats9980 explained it perfectly, but here’s a simpler version: you don’t claim the actual state tax amount. Instead, you report what you paid in the calendar year, including any balance paid for past years. This avoids a ‘chicken and egg’ scenario between state and federal returns.

@Luca
Right! Since Colorado starts with federal taxable income, you’d need the state tax amount paid to get that. So using the withheld amount instead avoids that mess and makes the returns more consistent year to year.

When you take a SALT deduction, the next year you’ll get a 1099 showing how much you got refunded, which gets added to your taxable income.

Aki said:
When you take a SALT deduction, the next year you’ll get a 1099 showing how much you got refunded, which gets added to your taxable income.

Not always. With the SALT deduction cap, it doesn’t automatically count as income.

@Khai
True, I get that too. I just go by what’s on my 1099-G.

Aki said:
@Khai
True, I get that too. I just go by what’s on my 1099-G.

The 1099-G doesn’t tell you what’s taxable though. It shows the refund amount, but you have to determine the taxable part yourself.

If you’re using the same tax software as last year, it might handle it for you. But it’s worth double-checking.

@Archer
Yep, my software covers it.

Aki said:
When you take a SALT deduction, the next year you’ll get a 1099 showing how much you got refunded, which gets added to your taxable income.

If I used the standard deduction in 2023, and don’t get a 1099-G, do I still report the refund? Maybe using the same tax software as suggested?

@Aldrin
Nope. If you used the standard deduction, then a refund isn’t reported the next year.

So for 2024, you’d have a big deduction for state taxes paid, but no added income from a 2023 refund. The 2025 return would include any 2024 refund, though (if taxable).

I avoid overpaying state tax so my actual payments match up more closely with what’s due.

I just use FreeTaxUSA, which handles federal first, then state, automatically. When I entered our health costs, it chose the standard deduction for federal, but itemized for state (California in this case).

ACA premiums count, as do Medicare payments if other requirements are met. Pricey prescriptions can add up too. Over-the-counter (OTC) meds usually don’t count unless prescribed for a specific health issue.

For example:

>Can I deduct vitamins and supplements?
Usually no, but if they’re prescribed to treat a diagnosed condition, then yes.

Everything OTC we use is prescribed by a doctor for some health problem we have. It’s not just a suggestion; it’s a must-take.

Any state tax refund for 2024 is taxable income in 2025, and you’ll get a 1099-G for it. But if you don’t itemize on Schedule A, you can ignore it.

This approach prevents loops in the tax return calculations, where the state refund changes your tax, which changes the refund again. It’s a tricky math problem called an infinite series, but not practical for tax forms.