Take Advantage of State Tax Laws
If you prepare your own tax returns, it’s best to fill out both your federal and state returns before actually submitting either one. But sometimes that’s just not possible. You might be too busy to do them both at once, so you send in your federal return (which has to be done first) one day, and put off your state return for another day. Then, when you’re finally working on your state return, you realize that something you did on your federal return is going to cost you more in state taxes than what it saves you in federal taxes. If that’s the case, it might make sense to amend your federal tax return—and pay a little more in federal taxes—so you can cash in on a larger state tax break.
Here’s an example: For the 2021 tax year, Andrew and Becky filed a joint federal return reporting $150,000 in federal adjusted gross income. They had $23,000 of itemized deductions, but they claimed the $25,100 federal standard deduction because it’s higher. Their overall federal tax liability was $18,975. A week after filing their federal return, Andrew and Becky started working on their state return. They soon realized that (1) their state standard deduction is much lower than the federal standard deduction, and (2) they cannot itemize on their state return unless they itemized on their federal return (which is a common restriction). Claiming their state standard deduction, which was only $4,000, resulted in an overall state tax liability of $7,000.
If Andrew and Becky file an amended federal return and claim their $23,000 in itemized deductions instead of the $25,100 standard deduction, their overall federal tax liability will increase by $462. However, that allows them to itemize on their state tax return, which will lower their overall state tax liability by $750. That’s an overall gain of $288!
And while we’re talking about state tax returns, remember that a change made to your federal return may very well affect your state tax liability, too. So, if you’ve already filed your state return, check to see whether filing an amended federal return means you’ll have to file an amended state return as well.