Answer: Yes and no. You can deduct certain prior-year tax payments on your current U.S. tax return if they were state or local taxes paid late – but you cannot deduct any federal income taxes paid for a prior year. In other words, taxes you paid for a previous year might reduce this year’s taxable income only under specific conditions.
In 2024, about 64% of tax returns resulted in refunds – meaning roughly 36% of filers had a balance due instead of a refund. Millions of Americans end up paying extra tax when they file, and it’s natural to wonder if those payments can be written off on next year’s return. Let’s break down exactly which prior year tax payments are deductible and which are not, and why. Below are the key takeaways before we dive deeper:
- 🚫 Federal taxes paid for a prior year are never deductible on your federal return. The IRS doesn’t let you write off federal income tax, no matter when you paid it.
- ✅ State & local taxes paid late can be deducted on your federal return – but only if you itemize deductions (Schedule A) and only up to the $10,000 SALT limit.
- 📅 Deduct in the year you actually paid the tax. We use a cash-basis system: if you paid a 2023 state tax bill in 2024, you deduct it on your 2024 return. Timing is everything.
- ⚠️ Interest or penalties on back taxes are not deductible. Paying late fees to the IRS or state for prior-year taxes won’t get you any tax break – they’re explicitly disallowed.
- 💼 Business taxes follow similar rules: A business cannot deduct federal income tax payments from prior years, but state taxes paid can often be deducted as a business expense. (Notably, corporations can deduct interest on tax underpayments as an ordinary expense, unlike individuals.)
- 💡 Standard vs. Itemized matters: If you take the standard deduction (like most taxpayers), those prior-year state tax payments won’t affect your federal return at all. You only benefit if your itemized deductions (including those taxes) exceed your standard deduction.
Now, let’s explore this topic in depth – covering federal vs. state rules, common scenarios, special cases, pitfalls, examples, and the reasoning behind these rules. We’ll also address frequently asked questions and state-level nuances that can impact your strategy.
What Counts as “Prior Year Tax Payments”?
First, let’s clarify the term. “Prior year tax payments” refers to money you paid this year to settle a tax liability from a previous year. Common examples include:
- Paying your state income tax bill for last year – for instance, you owed your state $500 for 2023 taxes and didn’t pay it until 2024.
- Federal back taxes from a prior return – e.g. you were audited for 2021 and in 2025 you are paying additional IRS tax assessed for that 2021 return.
- Late property tax payments – maybe you forgot to pay last year’s property taxes and paid them this year.
- Installment plan payments – if you’re on a payment plan for back taxes (state or federal), those ongoing payments are covering a prior year’s tax debt.
Crucially, current year estimated taxes or withholdings don’t count here – those apply to the current year. We’re talking about taxes that were due for an earlier tax period but paid afterward. Each tax year stands on its own, so people often ask if a payment made in a later year can be claimed somehow. The answer depends on the type of tax.
Why People Ask This Question
The question usually arises from tax refund vs. tax payment dynamics. If you get a state tax refund, you might have to report it as income the next year (if you deducted state taxes previously). So naturally, people wonder: if I had to pay instead of getting a refund, do I get a deduction next year? It feels like it should balance out. We’ll address the “tax benefit rule” later, but the short answer: If it’s a state tax payment, you may get a deduction for it on your federal return; if it’s a federal payment, you’re out of luck – there’s no equivalent deduction.
Keep in mind, U.S. tax law is a mix of federal and state systems. Your federal tax return has its own rules for deductions, while each state’s return has its own rules. Our focus is primarily how things play out on your federal 1040 return, but we’ll note a few state-specific quirks too.
Federal vs. State Tax Payments: Two Different Stories
Federal and state taxes are treated very differently when it comes to deductibility. Uncle Sam will not give you a deduction for paying him, but he will give you a deduction for paying your state or local government (within limits). This fundamental distinction is key to answering our main question.
Federal Tax Payments – No, You Can’t Deduct Them 😕
It might be disappointing, but federal income taxes you owe for any year are not tax-deductible on your federal return. The IRS and tax code explicitly disallow deducting federal income tax. That means:
- If you had a tax bill for last year’s federal taxes and paid it this year (say you owed tax with your extension or got a bill from an IRS audit), you cannot deduct that payment on this year’s 1040.
- There is no itemized deduction for federal income taxes paid. (Historically, this has always been the case – you don’t get to deduct your basic federal tax liability, or else it’d be a circular calculation.)
- This applies equally to regular payments and any late payments. Whether you paid your 2022 IRS balance due in April 2023 or October 2024, it’s not deductible. It was simply settling your federal tax obligation, not a deductible expense.
The reasoning is straightforward: The federal tax system doesn’t reward you for paying the taxes you legally owe to the federal government. IRC Section 275 (tax law) flat-out says no deduction is allowed for federal income taxes. The IRS even lists federal income tax under “Taxes You Can’t Deduct” in its instructions. In short, no federal tax can be deducted on a federal return – including prior-year taxes, self-employment tax, and federal payroll taxes. (One narrow exception: if you paid foreign income taxes, those can be deducted or credited – but foreign taxes are a different animal, and even then you’d typically take a foreign tax credit instead of a deduction.)
What about federal tax penalties or interest? Those are also non-deductible for personal taxes. If you paid an IRS late payment penalty or interest for a prior year, it’s considered a personal expense – no deduction allowed. (We’ll discuss a special rule for businesses and interest later on, but for individual taxpayers, it’s not deductible.)
So, if you’re asking, “I paid extra federal tax for last year, can I write it off this year?” – the answer is a firm NO. Each tax year’s federal tax is your own burden. You don’t get a federal deduction for paying federal taxes, regardless of timing.
State and Local Tax Payments – Yes, Deductible (Within Limits) 🎉
Here’s the good news: State and local taxes (often abbreviated as SALT) are deductible on your federal return, even if they were for a prior year – provided you meet certain conditions. The IRS allows taxpayers to claim an itemized deduction for a range of state and local taxes in the year paid. This includes:
- State income taxes (or general sales taxes)
- Local income taxes (e.g. city or county income tax in some places)
- State and local real estate (property) taxes
- Personal property taxes (like annual car registration taxes based on value in some states)
If you had a state tax balance due for a prior year and paid it this year, that payment counts as part of your deductible state taxes this year (again, only if you itemize). For example:
- You filed your 2023 state return and owed $1,000, which you paid in early 2024. That $1,000 is treated as a state tax paid in 2024. You can include it on your 2024 Schedule A, “Taxes You Paid,” along with any other state/local taxes you paid in 2024.
- Maybe you also paid 2024 state tax through withholding or estimates, plus some property taxes in 2024. All those get summed up (subject to the cap). Essentially, you deduct state/local taxes in the year you pay them, regardless of which year the tax is technically for. This is due to cash-basis accounting for individuals – you get the deduction when the cash leaves your hands.
However, since 2018 there’s a big catch: the SALT deduction limit. The Tax Cuts and Jobs Act imposed a cap on the amount of state and local taxes you can deduct. Currently, you can deduct at most $10,000 of SALT per year ($5,000 if married filing separately). This cap is in effect through tax year 2025 (unless laws change).
So, even if you paid a prior-year state tax, whether you actually get a benefit depends on this limit and whether you have enough total itemized deductions:
- If your total state+local tax payments exceed $10,000, any amount above $10k isn’t deductible. Paying a prior-year tax might just push you further above the cap, giving no extra write-off.
- If you already hit the $10k cap with current year taxes (common in high-tax states with big property tax bills), an additional payment for last year’s taxes won’t increase your deduction on the federal return. It’s effectively moot.
- On the other hand, if you’re under the cap (say you have $5,000 of property tax and no state income tax withheld because you usually get a refund, but this time you owed $1,000 extra), that $1,000 payment will increase your SALT deduction from $5k to $6k – assuming you itemize.
Here’s a quick rundown of prior-year tax payment deductibility for different taxes:
| Tax Payment | Deductible on Federal Return? |
|---|---|
| Federal income tax owed for a prior year (paid this year) | No. Federal income taxes are never deductible on your federal return, regardless of timing. |
| State or local income tax owed for a prior year (paid this year) | Yes, if you itemize deductions. Count it under the SALT deduction (added to state/local taxes paid this year, up to the $10,000 cap). |
| Property tax from a prior year (paid late this year) | Yes, if you itemize. Deductible as part of your property taxes on Schedule A (also subject to the $10,000 SALT cap). |
| State/local tax refund from a prior year (received this year) | Not a deduction, and may be taxable income instead (if you deducted those taxes before – we’ll explain this rule below). |
As you can see, state and local taxes are the ones that can help you out on your federal return. The logic is that the federal government allows a deduction for taxes you pay to state/local governments (to ease double-taxation and because it’s seen as a cost of earning income). But it strictly disallows deducting your payments to the federal government itself.
One more nuance: Only actual tax payments count. If part of your state tax bill was interest or penalty for paying late, that portion is not deductible. For example, you paid $1,000 of state tax from last year plus $50 interest – only the $1,000 is deductible as tax; the $50 interest is a personal expense. The IRS instructions explicitly say not to include penalties or interest in the deductible tax amount.
Quick Example – State Tax Paid Late
To make this concrete, imagine Jane Doe filed her 2023 California tax return and owed $2,500. She paid it in early 2024. In 2024, through payroll withholding, she also paid $5,000 in state taxes for her current year and $4,000 in property taxes. In total, she paid $2,500 (late prior-year tax) + $5,000 + $4,000 = $11,500 in state/local taxes during 2024. However, because of the SALT cap, she can only deduct $10,000 of it on her 2024 federal return. The extra $1,500 she paid (including part or all of that prior-year amount) isn’t giving her any federal deduction benefit. If, on the other hand, Jane’s other state/local taxes were only $6,000, adding her $2,500 late payment = $8,500, which is within the cap – she could deduct the full $8,500 (assuming it makes sense for her to itemize at all).
Itemized Deduction vs. Standard Deduction Consideration
It’s worth emphasizing: You only deduct state/local taxes if you’re itemizing deductions. If you typically take the standard deduction (which is a fixed amount – e.g. $13,850 for single in 2023, ~$27,700 for married filing jointly, and slightly higher in 2024 due to inflation), then additional tax payments won’t change your taxable income. Many people use the standard deduction, especially after it nearly doubled in 2018.
So if your total itemizable expenses (including SALT, mortgage interest, charitable donations, etc.) don’t exceed your standard deduction, you won’t itemize – meaning you get no specific benefit from those prior-year tax payments. They’ll be moot from a federal perspective, beyond that standard deduction everyone gets. In fact, about 90% of taxpayers now take the standard deduction, so only the remaining 10% who itemize would potentially see a difference from deducting those prior-year state taxes.
Tip: If you had an unusually large state tax payment (say you had a big one-time income event causing a tax bill) that, when added to your other deductions, just barely tips you over the standard deduction, consider itemizing. It might yield a lower tax bill for that year. Conversely, if the numbers don’t work out, taking the standard deduction could be better despite having paid those taxes. Always compare both options if you’re on the fence.
How and When to Deduct Prior-Year State Tax Payments
If you do itemize, here’s how it works in practice to deduct a prior-year state or local tax payment:
- Schedule A (Itemized Deductions), Line 5a is where you list state and local income taxes (or sales taxes). This is where you’d include any state income tax paid during the year – regardless of which year the tax was for. The IRS instructions confirm you can include “state and local income taxes paid [this year] for a prior year (for example, taxes paid with your [previous year’s] return).” So, if you mailed a check in spring or made an online payment, just add it to your total.
- Line 5b is for state and local real estate taxes (property tax on your home, etc.), and 5c for personal property taxes (like car taxes). Again, you deduct them in the year you paid them. So if you paid a delinquent property tax bill from last year, you’d include it in this year’s amount.
- The form then has you sum these up and apply the $10,000 cap on Line 5e. Any amount above that is automatically not deductible.
In short, you don’t need a special line for “prior-year tax payment” – you just combine it with the rest of that category of tax in the year of payment.
Example: John owed $3,000 on his 2022 state taxes, which he paid when filing in April 2023. During 2023, his employer withheld $5,000 for 2023 state taxes, and he also paid $4,000 in property taxes in 2023. On his 2023 Schedule A, John will report $5,000 + $3,000 = $8,000 on line 5a (state income taxes paid in 2023) and $4,000 on line 5b (property taxes). That totals $12,000, but line 5e will cap it to $10,000. John effectively loses the deduction for $2,000 of what he paid due to the SALT limit. If John’s standard deduction is $13,850 (single) and his other itemized deductions (like mortgage interest) are, say, $5,000, then his total itemized would be $10,000 (SALT limited) + $5,000 = $15,000, which is slightly above the standard deduction – so itemizing saves him a bit. Without that $3,000 prior-year payment, his SALT would have been $9,000 and total itemized $14,000, still above standard but by a smaller margin. The extra payment gave him an additional $1,000 deductible (up to the cap), saving maybe around $220 in federal tax (if he’s in roughly 22% bracket). Not huge, but something.
Now, if John had paid federal tax late instead, no such deduction would appear – zero effect on Schedule A, since federal tax isn’t allowed.
Important: If you live in a state with no income tax (or you otherwise choose to deduct sales taxes instead of income taxes on Schedule A), then a prior-year state income tax payment wouldn’t matter for federal deduction because you’re not using state income tax as your deduction. You would have elected to deduct state sales tax (which is an alternative you can choose annually). In that case, you can’t double-dip and also deduct an income tax payment. Most people in no-tax states just use the sales tax tables. So this scenario of deducting last year’s state tax is most relevant if you do pay state income tax and itemize using it.
The Tax Benefit Rule: Refunds vs. Payments
We can’t discuss deducting state tax payments without touching on the flip side: state tax refunds. Here’s the connection:
- If you deduct state taxes in one year (because you itemized), and then you get a refund of some of those taxes the next year (meaning you overpaid), that refund often becomes taxable income on your federal return. This is known as the tax benefit rule. Essentially, you got a tax deduction benefit last year for paying, say, $5,000 in state tax, but if $500 of that was returned to you as a refund, you didn’t actually need the full $5k deduction. So the IRS says: include the $500 as income this year, to offset the previous deduction benefit. It prevents an unfair double benefit.
- In contrast, if you owed more state tax (instead of a refund) and paid it after filing, there was no extra deduction last year for that amount. So logically, you might think you get a benefit this year for paying it. And indeed, as we’ve explained, you do – as an itemized deduction, if applicable.
In short: State tax refunds are taxable only if you got a deduction before; state tax payments (for prior year) are deductible in the year you pay them. They’re opposite sides of the same coin, balancing each other out over time if you itemize. If you took the standard deduction last year, then your state refund is not taxable (because you got no tax benefit from paying those state taxes); similarly, if you take the standard deduction this year, an extra state payment doesn’t give you a benefit (because you’re not itemizing anyway).
The IRS Schedule 1 has a line (Line 1) for “taxable refunds of state/local taxes” – that’s where you report last year’s refund if it’s taxable. So don’t confuse that with any deduction; it’s actually the reverse (income).
The interplay can get tricky, but the key point is: deductions for state tax payments and income from state tax refunds are two sides of the tax-benefit rule. If you never itemize, you can ignore this rule entirely: refunds aren’t taxed and payments aren’t deducted. If you always itemize and you oscillate between owing and refund, then one year you’ll get a deduction, next year you might have to report the refund, etc.
Example: Maria itemized on her 2023 return and deducted $8,000 of state tax (which included a big payment she made for 2022). In 2024, she actually got a $500 refund from the state (because she over-withheld). On her 2024 federal return, Maria will have to include that $500 as taxable income (since it gave her a benefit in 2023). Conversely, if Maria had not itemized in 2023, she wouldn’t claim the payment as a deduction in the first place, and then the $500 refund in 2024 would be purely non-taxable to her. The tax code ensures you don’t get whipsawed – you either get both deduction-and-income or neither.
Special Scenarios and Nuances
There are some special situations and nuances worth discussing so we cover all the semantic subtopics around this issue:
1. Late Property Taxes and Other Local Taxes
It’s not just state income tax that can be paid late. Many people have questions about property taxes: say you forgot or delayed your county property tax payment. The rule is the same – you deduct property tax in the year you actually paid it. It doesn’t matter what year the tax was originally assessed for, as long as it was a legitimate tax on you and you paid it.
For example, your county billed you in 2023 for property taxes, due by Jan 31, 2024. If you pay in January 2024, you’ll include that amount in your 2024 Schedule A (not 2023, since you didn’t pay it in 2023). If you decide to pay it by Dec 31, 2023 (early) instead, then you would include it on your 2023 return. You have some timing flexibility if the bill spans year-end.
However – you generally cannot pre-pay taxes years in advance just to snag a deduction. The IRS issued guidance when the SALT cap came in: if you try to pay a future year’s state or local income tax before it’s officially due or assessed, that prepayment is not deductible in the current year. (They did this because in late 2017, folks in high-tax states tried to prepay 2018 taxes before the new cap took effect.) The rule of thumb is: you can deduct it if the tax has been assessed and corresponds to a defined tax period that’s started. You can’t, for instance, pay 5 years’ worth of property taxes in advance and deduct them all now – the excess would be considered not properly deductible (and most local tax collectors won’t even accept such prepayments anyway).
So, paying last year’s taxes now = OK to deduct (this year); paying next year’s taxes early = only deductible if the bill was actually issued and due. If you pay a bill that covers a period exclusively in the future, you have to wait.
To put it simply, any tax payment for a past period is deductible in the year paid, and any tax payment for a future period is deductible only when that period arrives (if the tax is assessed and paid then).
2. Prior-Year Federal Tax Refunds or Payments – State Return Treatment
We know federal taxes aren’t deductible federally. But what about on your state income tax return? Interestingly, a few states allow you to deduct federal income taxes on the state return. Most states do not (they start from federal AGI or taxable income and have no line for federal tax), but states like Alabama, Iowa, Missouri, and Oregon historically provided some deduction or partial deduction for federal taxes paid. For instance, Alabama allows residents to deduct their federal income tax liability when calculating state income tax – effectively giving relief at the state level for paying federal taxes. Missouri and Oregon have (or had) limits on it, phasing out for higher incomes.
So, if you paid a big federal tax bill for a prior year, it won’t help you on your federal 1040, but in Alabama it could increase your deduction on your state return (because Alabama says “did you pay federal tax this year? deduct it here”). Missouri similarly permits a deduction up to a cap. This is a state-level nuance: not directly what the main question asks, but it’s useful context if you’re looking at your whole tax picture. In most states, you won’t list federal taxes at all, but in those few, it can be a factor.
Conversely, state tax payments are usually not deductible on the state’s own return (that would be circular). You won’t generally deduct a prior-year state tax payment on your state return – you already get credit for it by settling the tax. (One could imagine a state credit for interest paid or so, but that’s uncommon.)
The main point: Federal return gives deduction for state taxes; some states give deduction for federal taxes. They sort of help cover each other’s taxes in a few cases.
3. Self-Employed Individuals and Prior-Year Taxes
If you’re self-employed or a small business owner (sole proprietor, single-member LLC, etc.), you might wonder if there’s any difference. On your personal return, you pay self-employment tax (SE tax) which is essentially Social Security/Medicare taxes for yourself. You get to deduct half of your SE tax above the line (an adjustment to income) in the year it pertains to. But if you underpaid your SE tax in a prior year and have to pay it now (say an IRS recalculation found you owe more SE tax for last year), you cannot deduct that on this year’s return. The proper approach would be to amend the prior-year return to reflect the increased SE tax and get the deduction for half of it in that prior year. There’s no current-year deduction for a prior-year SE tax payment.
Similarly, if you are making payments on prior-year income tax that stemmed from your business profits, those are still just personal taxes (since sole prop income tax flows to your 1040). They’re treated as we described: state portion deductible if itemized, federal portion not.
One thing self-employed folks can do is adjust estimated tax planning – for instance, if you owed a lot in state tax for last year, you might increase your quarterly estimates for this year (or have applied an overpayment) and those counts as paying state tax this year, giving a deduction if itemizing. But that’s just normal timing.
4. Businesses (C-Corps, S-Corps, Partnerships) and Prior Year Taxes
For business entities, the scenario is a bit different from individuals, but the fundamental concept holds: income taxes themselves are not deductible expenses on a tax return.
- A C-Corporation pays corporate income tax to the federal government (and possibly state corporate tax to the state). On the corporation’s income statement, tax reduces the net profit, but when calculating taxable income for the current year, you don’t get to deduct federal income tax payments – that’s basically the bottom-line result of the tax return itself. If a C-corp in 2025 pays an additional $100k of IRS tax from its 2023 audit, it can’t deduct that $100k on its 2025 corporate return. It will simply show up as a use of cash, not a deductible expense for tax purposes.
- State income taxes for a business are generally deductible on the federal business return. For example, if a corporation paid $20k to New York State for 2024 taxes (or even paying a 2023 underpayment in 2024), that $20k is an expense that reduces federal taxable income. Unlike individuals who have a SALT cap, corporations do not have a $10k cap – that cap was only for personal itemized deductions. Businesses can usually deduct state and local taxes fully as a business expense. So if a corporation paid a prior-year state tax in the current year, it just books it as a tax expense in the current year (or accrues it appropriately). There’s no separate schedule; it just lowers profit.
- S-Corps and Partnerships: These pass-through entities generally don’t pay federal income tax at the entity level. (They might pay some state-level fees or taxes, like some states have franchise taxes or the newer elective pass-through entity taxes – more on that in a moment.) If an S-corp or partnership had to pay a state tax for a prior year (say a California LLC fee or something that was owed), that payment is a deductible business expense (reducing the K-1 income that flows to owners). Federal taxes aren’t paid by the S-corp, so no issue there.
A summary of business scenarios might help:
| Business Scenario | Deductible? |
|---|---|
| C-Corp pays a prior year federal income tax bill (e.g. from IRS audit) | No. A corporation cannot deduct federal income taxes (current or prior year). These payments don’t reduce the corp’s taxable income on its federal return. |
| C-Corp pays a prior year state income or franchise tax | Yes. State taxes paid are deductible business expenses. A prior-year state tax payment is typically deducted in the year paid (or accrued, if using accrual accounting). |
| Pass-through entity (S-Corp/Partnership) pays state taxes for prior year | Yes, generally. Many states now allow pass-through entities to pay tax on behalf of owners (to work around SALT cap). These taxes, even if related to prior-year income, are deductible at the entity level on the business return. |
| Sole proprietor (filing on Schedule C) pays prior-year taxes | Partially. The business itself doesn’t deduct personal income taxes. Federal tax paid is not deductible. State tax paid can only be deducted on Schedule A (itemized) as discussed, not on Schedule C. |
Notice an interesting nuance for corporations: Interest on tax underpayments. For individuals, interest on any tax deficiency is considered personal interest and is not deductible (just like credit card interest isn’t deductible). But for corporations, interest paid on late tax obligations is typically considered a cost of doing business and is deductible. In fact, currently corporations can deduct interest on federal or state tax underpayments as a business expense. There has been talk in the tax world about possibly disallowing that (because some see it as a loophole for big companies), but as of now it stands: if a C-corp paid $10,000 in interest on a late tax bill, that $10k would reduce their taxable income (just like interest on any business loan). This is a nuanced difference between personal and corporate taxes. Penalties, however, are not deductible for anyone – the tax code (Section 162(f)) forbids deducting fines or penalties paid to a government. The idea is you shouldn’t get a tax break for doing something wrong (like paying a penalty for late filing or negligence).
So a business should separate the components: tax principal (federal non-deductible, state deductible), interest (deductible for business, not for individual), penalties (not deductible for either).
5. Accrual vs. Cash Method Timing for Businesses
Most individual taxpayers are on a cash basis – deduct when paid. Businesses might use an accrual method, meaning they deduct expenses when incurred. For taxes, the IRS has special timing rules. Generally, a business on accrual can accrue an expense for a tax year within that year if the liability is fixed and economic performance has occurred (for taxes, economic performance is typically when you pay the tax, unless it’s treated as a recurring item). There’s a rule allowing an accrual taxpayer to deduct state taxes for a year if they are paid within a short period after year-end (e.g. within 8½ months or by the return filing date, under the recurring item exception).
This gets technical, but the practical upshot: A corporation might deduct its 2024 state tax on the 2024 return even if paid in early 2025 (since that’s normal timing), by accruing it. But if it’s truly a prior-period tax (like a back tax from an audit of 2022), the corporation will likely deduct it in 2024 when paid (because that’s when the liability became fixed and was paid – unless they had it reserved earlier).
Individual taxpayers don’t usually worry about accrual vs cash – they’re cash. Just remember: for personal taxes, only the paid date matters. You can’t say “I owed it last year, so I want to deduct it last year” unless you actually paid it last year (which would involve amending the prior return to claim it if you missed it). If you want a deduction in the prior year, you needed to have paid by December 31 of that year.
6. Net Operating Loss Carrybacks (Recovering Prior Taxes)
This is a bit tangential but worth noting in the realm of “prior year tax payments”: Sometimes, instead of deducting a prior year’s tax on the current return, you might apply current losses to a prior year to get a refund of taxes paid. For instance, under certain rules (like those temporarily expanded by the CARES Act for 2018-2020), businesses could carry back a net operating loss to prior years and effectively deduct that loss against prior-year income – which results in a refund of prior year tax paid. That’s not a deduction on your current return per se; it’s more like amending the past. But it is a mechanism to recoup prior taxes if conditions allow.
For individual taxpayers, the concept might appear if you amend a prior year return to claim a missed deduction or credit – effectively reducing that prior year’s tax. While not exactly “deducting prior year payment on this year’s return,” it’s another way of adjusting prior vs current obligations. We mention it just to differentiate: carrying back losses or amending returns can get you refunds for prior years, whereas what we’re focusing on is taking a deduction on the current year’s return for a payment made this year.
In summary, the tax code generally wants you to match deductions to when expenses are paid or incurred, and keep each tax year’s liabilities mostly separate, with only carefully defined exceptions.
Pros and Cons of Accelerating Tax Payments for Deductions
Sometimes taxpayers have a choice: Pay a state tax bill now (late in the year) or wait until next year (by the due date). Especially when a year is ending, this decision can affect your deductions. Here’s a look at the pros and cons of paying a state/local tax liability before year-end to deduct it this year:
| Pros of Paying State Tax Early (This Year) | Cons of Paying Early |
|---|---|
| ✅ Potential immediate tax deduction: If you itemize and haven’t hit the SALT cap, paying now lets you include it in this year’s deductions, possibly lowering your current federal tax. | 🚫 SALT cap limits benefit: If you’re already at or near the $10k cap, an early payment might not increase your deductible amount at all. You could prepay and see no federal tax difference. |
| ✅ Avoiding interest/penalties: Paying a state bill before the due date (or before year-end if it’s due early next year) can save you from additional state interest charges. This isn’t directly a federal tax benefit, but it’s a financial pro. | 💰 Cash flow downside: You’ll be out the money sooner. Paying in December (instead of, say, next April) means you lose the use of that cash for those months. If money is tight, waiting might be necessary, deduction or not. |
| ✅ Possibly reduce AMT exposure: Although state taxes aren’t deductible for Alternative Minimum Tax (AMT) purposes either, pre-2018 this was a consideration. (Post-2018, SALT isn’t deductible under AMT or regular once capped, so this is less of an issue now for most.) | ❌ Can’t prepay beyond assessed amount: You can only deduct what’s actually billed/owed. You can’t just throw extra at the state to push into a deduction. If the next installment isn’t due yet, pre-paying too far ahead either won’t be accepted or isn’t deductible by IRS rule. |
| ⏳ Locks in deduction before potential law changes: Currently the SALT cap is set to expire after 2025. If you think Congress might extend it or change deductions, doing what you can now under current rules is sometimes a strategy. | 🌀 Uncertain itemizing situation: If you’re not sure you’ll itemize this year (versus next year), you might bunch deductions to one year. Paying early could backfire if it turns out you still take standard this year but would itemize next year. Timing matters only if it flips your itemization status. |
In short, if you’re safely itemizing and under the SALT limit, accelerating a state/local tax payment into this year can yield a real tax benefit (and save some interest). But if you’re over the limit or on standard deduction, there’s no advantage to paying early from a tax perspective (though you might still do it to avoid state penalties). Always weigh the deduction gain versus your cash needs.
Example: Let’s say it’s December and you have a $2,000 state tax bill due in April. If you pay it in December, you can include that $2k on this year’s Schedule A. If you were at $8k of SALT already, that $2k will take you to the $10k cap – fully deductible. If you wait and pay in April, you’d include it on next year’s return. Maybe next year you also will hit the cap with other taxes, so delaying might cause you to lose it. On the flip side, if you’re already at $10k SALT this year, paying now doesn’t increase your deduction at all – might as well hold the cash until it’s actually due. So knowing where you stand relative to the SALT cap and itemizing is key.
Pitfalls and Common Mistakes to Avoid
When dealing with prior-year tax payments and deductions, people often stumble in similar ways. Here are common pitfalls and how to avoid them:
- Mistake: Trying to deduct federal tax payments (or thinking “I paid the IRS $X, where do I deduct that?”).
Fix: Remember that federal income taxes are not deductible. Don’t list them anywhere on Schedule A. It’s a wasted effort and can even flag an error if you try. Accept that those payments won’t reduce your taxable income. - Mistake: Deducting state taxes in the wrong year. For example, someone pays a tax in January 2025 but tries to deduct it on their 2024 return (or vice versa).
Fix: Deduct in the year paid. Keep good records of when you actually made each payment. If you’re using tax software, enter the dates or tax year carefully – many programs ask “Did you pay any 2023 state taxes in 2024?” etc., to handle this. Don’t assume the software “knows” you paid last year’s bill; you might need to input it manually. - Mistake: Double-counting a tax payment. Sometimes a state tax payment gets mis-entered as both a payment and applied to estimated taxes, for example.
Fix: Ensure each payment is only entered once in the appropriate category. If you applied an overpayment from last year to this year’s taxes, don’t also count it as if you paid cash – it’s one or the other. (The IRS treats a carryover of refund as a payment for the next year, which is fine to count once.) - Mistake: Forgetting that the $10,000 SALT cap might already be reached. Some filers add up all these taxes and don’t realize the deduction is capped. This can lead to overestimating your deduction and a surprise when your refund is lower.
Fix: Keep the SALT limit in mind. If you live in a high-tax area, property tax alone might hit the cap. Use worksheets or software to see if you’re at the limit. Don’t assume every dollar you paid will deduct beyond $10k. - Mistake: Not realizing that standard deduction vs itemizing choice wipes out the issue. People might stress about deducting a $500 late tax payment when they’re taking a standard deduction regardless (meaning that $500 doesn’t affect their tax outcome).
Fix: Figure out early if you have enough deductions to itemize. If not, don’t chase receipts for a deduction you won’t actually use. If yes, then gather all relevant taxes paid. - Mistake (for businesses): Deducting something like a penalty or fine for prior-year taxes on the business return.
Fix: Segregate the payment into tax, interest, penalty. Only deduct the eligible portions (tax to state, interest if corp; don’t deduct penalty or federal tax). On books, you might record the full payment as an expense, but for the tax return you add back nondeductible parts. - Mistake: Overlooking elective pass-through entity (PTE) taxes. This is a newer thing: many states allow S-corps or partnerships to pay state tax at the entity level (so owners get a credit and bypass SALT cap). If your business did this for a prior year’s income (some states had retroactive elections), make sure you or your accountant deduct it properly on the entity return. Don’t also try to deduct it on Schedule A personally – that would double-dip.
Fix: Understand where the deduction falls. PTE tax paid by an S-corp is deducted by the S-corp on its federal return (reducing K-1 income). You do not deduct it again on Schedule A. It’s one or the other: either you paid personally and deduct on Schedule A, or the entity paid and deducts on the entity return. - Mistake: Misinterpreting a state tax notice or audit adjustment. If a state says you owe more for last year and you pay it now, don’t forget to include that in your deductions (if itemizing). It’s easy to pay a bill and forget to update your tax file for the deduction. Conversely, if you get a state tax refund via an adjustment, remember that might be taxable income if you deducted those taxes before.
Fix: Keep a checklist when you get any correspondence about prior year taxes: did I pay something or get a refund? Then note to include it in the next return appropriately (deduction or income line). - Mistake: Assuming prior-year tax credits are deductible. For instance, say you paid a prior year’s tax, and in doing so you claim a credit (like an energy credit retroactively on an amended return reducing the tax). That credit lowers the tax you owe, but credits themselves are not “deductions.” It’s separate.
Fix: Treat credits and deductions distinctly. If you paid less tax because of a credit, you have less tax paid to even consider deducting. Usually no action needed except accuracy – just don’t count money you didn’t actually pay.
By staying aware of these pitfalls, you can ensure you get every deduction you’re entitled to without running afoul of any rules or misstatements. When in doubt, consult IRS publications or a tax professional to clarify the treatment of a specific payment.
Relevant Law Changes and Court Rulings
Tax laws evolve, and it’s useful to know any major changes or legal decisions that impact deducting prior-year tax payments:
- The biggest recent change was the 2017 Tax Cuts and Jobs Act (TCJA) imposition of the $10,000 SALT deduction cap (starting 2018). Prior to that, if you paid large state or local taxes (including any prior-year amounts), you could generally deduct them fully if you itemized. Now, many taxpayers in high-tax states found that they no longer get a marginal benefit from additional state tax payments beyond $10k. This cap dramatically changed the calculus of “should I prepay this tax?” and also spurred strategies like the pass-through entity tax workaround at the state level. The SALT cap has been controversial – a group of states (NY, NJ, CT, MD) sued the federal government claiming the cap was unconstitutional. However, in 2021, the Second Circuit Court of Appeals upheld the SALT cap, and the U.S. Supreme Court declined to review the case. In other words, the courts have confirmed the $10k cap is valid law. So we’re stuck with it (at least through 2025). Keep an eye on Congress: if the cap sunsets after 2025, suddenly state tax payments (even large ones) could become fully deductible again, which might revive strategies like year-end tax payment bunching in a big way.
- IRS guidance on prepayments (2017): As mentioned, the IRS issued an advisory stating that pre-paying 2018 state/local income taxes in 2017 only got you a 2017 deduction if the tax was actually assessed in 2017. Prepaying anticipated taxes that hadn’t been billed didn’t count. This was essentially a clarification to stop people from circumventing the new SALT cap early. That guidance still stands: you can’t just pay forward arbitrarily.
- Interest deductibility for corporations: There hasn’t been a specific court case on this recently (it’s longstanding that corp interest on taxes is deductible under normal rules). But it’s interesting to note the policy discussions – if laws change to disallow that, corporations might lose a deduction they currently enjoy on prior-year tax interest. For now, no change: interest on prior-year federal or state taxes remains deductible for businesses, not for individuals.
- Penalties disallowed: A noteworthy legal foundation is 26 USC §162(f), which disallows any deduction for fines or penalties paid to a government for law violations. This is why tax penalties, parking tickets, etc., are not deductible. Court rulings occasionally parse what counts as a non-deductible penalty vs. a compensatory expense, but paying overdue tax is not a penalty (so state tax itself is fine to deduct, just not the penalty portion). A Tax Court case years ago might have clarified that interest on state tax is not a “penalty” and thus individuals tried to deduct it as investment interest – but Congress closed that by classifying personal interest broadly as non-deductible in 1986 and especially post-1990 for things like tax interest. So any ambiguity there has been resolved by statute.
- State-level court rulings: Some states litigated issues around whether a taxpayer could deduct something like a local tax prepayment. Most of those issues are handled by statute or regulation rather than big court cases, but if you’re in a state with unique tax laws (e.g. some states disallow a deduction for late-paid property taxes if over a certain time – hypothetical example), you’d want to check state tax court rulings or administrative guidance. Generally, states follow a similar pay-when-paid approach for their own allowable deductions.
- Charitable contributions workaround: While not directly “prior year tax payment,” one development was people trying to reclassify state tax payments as charitable contributions to skirt SALT limits (donating to state-run funds in exchange for credits). The IRS and Treasury issued regulations largely shutting that down (you must reduce your charity deduction by any state tax credit you receive). They did provide a safe harbor to let some of those effectively become a SALT payment deduction if structured that way, but again, complex area outside our main topic.
In summary, the legal landscape currently says: No deduction for federal taxes, yes (capped) for state/local, and we’ve settled that in courts. The SALT cap is the main legal constraint that came out of legislation rather than court action (and it survived court challenges). Taxpayers should plan with the current laws in mind but remain adaptable if limits change in the future.
FAQs: Deductions for Prior Year Tax Payments
Finally, let’s address some frequently asked questions people (often on forums like Reddit’s r/tax) have on this topic. We’ll keep the answers concise (under 35 words each) for quick reading:
Q: Can I deduct state taxes I paid for last year on this year’s return?
A: Yes – if you itemize. State income or property taxes paid this year (for last year’s bill) count toward your SALT itemized deduction (up to $10k cap).
Q: I paid federal taxes late for a prior year. Deductible?
A: No. You get no deduction for federal income taxes paid, even if it’s a prior-year balance paid now. Federal taxes are never deductible on a federal return.
Q: What about interest or penalties on late taxes?
A: Not deductible. Personal interest and penalties for late tax payments can’t be deducted on your return. They’re considered personal expenses or fines.
Q: I’m on a payment plan for back state taxes. Each payment deductible?
A: Yes. Each amount of state tax principal you pay in the current year is deductible (if you itemize). But interest or penalties included in those installments are not deductible.
Q: I paid last year’s property taxes this year – can I claim them?
A: Yes. Deduct property taxes in the year paid. Even if they were due last year, paying them this year lets you include them in this year’s SALT deduction (subject to cap).
Q: We usually take the standard deduction. Do my prior-year tax payments help at all?
A: Not on your federal return. If you’re using the standard deduction, itemized expenses (like state tax payments) don’t affect your tax calculation.
Q: My tax software asks about “last year’s state taxes paid.” Why?
A: It’s gathering info to include any prior-year state tax payment in your itemized deduction. This ensures you don’t miss adding a payment made for your previous state return.
Q: If I amended last year’s return and paid more tax now, can I deduct it this year?
A: If it’s state tax, yes – treat it as paid this year for deduction. If it’s additional federal tax from the amendment, no deduction (federal not deductible).
Q: I got a huge state refund this year from a prior year adjustment. Do I pay tax on that?
A: Only if you itemized and deducted state taxes for that prior year. If so, some or all of the refund may be taxable income this year under the tax benefit rule.
Q: Can a business deduct a tax penalty paid for a prior year?
A: No. Fines or penalties paid to government (federal or state) are never tax-deductible for businesses (or individuals). Only the tax portion and possibly interest (for businesses) are deductible.
Q: What is the SALT cap workaround for pass-through businesses I’ve heard of?
A: Some states let S-corps or partnerships pay state tax at entity level. That payment is deductible to the business (no $10k cap), and owners get a credit so they aren’t double-taxed.
Q: If SALT cap ends in 2026, will all my state tax payments be deductible again?
A: Potentially yes, if the law expires. After 2025, the $10k cap is set to expire, which would restore full deduction of state and local taxes unless new legislation changes it.
Q: Are Social Security or Medicare taxes I pay deductible next year?
A: No, employee Social Security/Medicare (FICA) taxes aren’t deductible. If self-employed, you deduct half of SE tax, but in the year it applies – not as a later itemized deduction.
Q: Does paying prior year taxes affect my current year estimated tax requirements?
A: Not directly. Estimated tax safe harbor is usually based on last year’s tax. Paying last year’s balance now doesn’t reduce this year’s required estimates (but it settles last year’s debt).