In Oregon, we have income tax but no sales tax.
We are allowed to deduct (if I remember correctly) up to about $3,500 of our federal income tax. But even that looks like it is going to go away.
You are allowed to deduct state income tax if you itemize your deductions. Does this make it a wash? No… here’s why:
Your income: $100,000
Your federal tax rate: 20%
Amount you owe with no state income tax: $20,000.
Net in your pocket without a state income tax: $80,000.
Amount deducted from your paycheck for state income tax: $10,000 (10% rate)
Amount you owe feds with a deduction: (20% x $90,000) = $18,000
Amount in your pocket: ($100,000 - $18,000 - $10,000) = $72,000
Whatever numbers you choose will work the same way. A deduction is not the same as a credit and as a result you will have less money at the end of the day. It won’t be the state rate lower, but it will be lower. Your effective state rate will be: state rate - (state rate * fed rate). In this example, that would be 10% - (10% * 20%) = 8%. On $100,000, that would be $8,000. And, as shown, you are in fact down $8,000 more than if you didn’t have a state income tax.
In raw formula form:
X = amount you made
f = federal tax rate
s = state tax rate
Amount you have with no state tax:
x - f*x
Amount you have with state tax and no deduction for state tax:
x - fx - sx
Amount of fed tax with state tax deduction
f*(x - x*s)
Amount you have with fed tax and state tax deduction
x - f*(x - xs) - xs (income - fed tax liability - state tax liability)
= x - fx + fxs - xs
Compare this with x - fx - sx.
The difference is, of course, that little f*s factor talked about earlier. In other words, that deduction will save you just a fraction of what you would save if there were no state tax to begin with.
This is worst case as you might fall into a lower fed bracket with the added deduction, but it is highly unlikely this will make the difference to the point you break even.
