Originally Posted by sailingfun

It’s treated that way because you took it as a deduction in the prior year. With the new 10,000 cap it will happen less often. If they did not have that rule everyone with two touching brain cells would increase their state tax withholding to the maximum possible since you will get it all back when you file and avoid a bunch of federal income tax.

Originally Posted by Buck Rogers

Tunes -- Not trying to argue with you, and I live in a tax free state. I think if you look at this logically you can see the state's position. Let me give you a hypothetical that is uber extreme but illustrates my point. If a person made $70,000 in a year and chose his w-4 to overpay taxes of $5,000 a month (let's say he did not need current income), he would in effect pay $70,000 in taxes and have zero income. The state would be taxing nominally 7% of $0. So the state gets 0 money in their coffers to pay for infrastructure. The following year the federal government says, "I don't know WTF you're doing, but here is $55,000 taxes refund." (Thus you're $15,000 in taxes or thereabouts would have gotten paid to the federal government.) The state would still be left holding the bag with 0 income reported. The state, however, says "Wait a minute, you owe us taxes on $55,000 of income you didn't report," which seems fairly logical to me.

Since I don't pay any state taxes, I may have misunderstood what you were saying and if somehow you have to pay state tax on federal tax, I would agree with you wholeheartedly on the BS issue.

Clear as mud?

PS: Sorry, I see Sailing addressed this. I'm just a very slow typist.