Deductions on state and local income taxes are capped at $10,000 for both single and married filers, but if you live in a high-tax state, you still have options for easing your tax burden.
Residents of high-tax states — such as California, New York, New Jersey, Maryland, Connecticut, and Oregon — must limit their state and local income tax deductions to $10,000. That’s typically not enough to offset the extra money they owe in state and local taxes each year compared to those who live in other states. Of course, one option for taxpayers in high-tax states is to move to a lower-tax state, such as Nevada, Texas, or Florida. However, most people aren’t willing to uproot their lives just to save money on taxes.
Fortunately, there are other ways to reduce your taxes if you live in a high-tax state. Consider the following tactics.
Save more in retirement accounts.
Retirement accounts like IRAs and 401(k)s allow you to tuck tax-deferred income away as long as you continue working. The annual 401(k) contribution limit for 2022 is $20,500, and the annual IRA contribution is $6,000 (and you can make additional catch-up contributions if you’re 50 or older). If you live in a high-tax state, consider putting more money in these accounts to save on federal income taxes. When you retire, you might even move to a state with lower income taxes, reducing the amount you owe when you start taking payouts from traditional IRAs and 401(k)s. Keep in mind that Roth accounts are not tax-deferred and cannot be used to minimize the state taxes you’re paying today.
Take advantage of state deductions.
Most states offer a number of deductions and credits for taxpayers. The type and amount of these deductions differ from state to state, so be sure to check your state’s tax regulations to see what’s available to you. Here are some of the common deductions:
- Job-Related Deductions. Self-employed workers and business owners should consider itemizing their tax returns to take advantage of the array of deductions available. These include office expenses, supplies, travel expenses, and insurance. Even workers who are not self-employed may be eligible for certain deductions, such as work-related travel and clothing expenses, and legal and licensing fees.
- 529 Contributions. A 529 account is used to save money for secondary education. Some states allow you to deduct contributions to a 529 from your taxable income.
- Caregiving Expenses. If you pay the caregiving expenses of a family member or friend, you may be able to deduct those expenses, as long as the person you’re taking care of has an income that doesn’t exceed certain limits. The deductibility and the income limits can vary widely from state to state.
Invest in tax-favored bonds.
The interest paid out by some bonds is free from state and local income taxes. Municipal bonds are typically free from income taxes if you live in the same municipality the bonds are issued in.
Federal bonds are also generally exempt from state taxes. Some states, like California and New York, offer tax-favored bond mutual funds, whose interest is free from all income taxes.
The current tax code doesn’t do any favors to people who live in high-tax states, but you’re not necessarily stuck. Before you pack your bags in search of cheaper pastures, consider using some of the strategies above to ease your state tax burden.
A version of this article appeared in our partner magazine, The Essential Tax Guide: 2023 Edition.