Client Question: Standard or Itemized Deduction Differences, Federal vs. State

May 08, 2019
By Andrea Brashears-Lusk, CFP®

Q: Is it possible to take the standard deduction on the federal tax return, but use itemized deductions on the state tax return?

A: Before the new tax law went into effect, taxpayers generally chose between the standard or itemized deduction, depending on which was higher. While this is still the case, more taxpayers will now take the standard deduction, which is nearly double from previous years. In addition, limitations on itemized deductions have reduced their effectiveness for many taxpayers. But should you make the same choice on your state tax filing? Do you have an option to choose different deduction strategies?

Although some states increased their standard deduction in the past year, in most instances allowable state deductions are still significantly lower than the federal standard deduction. In addition, some states do not allow you to itemize your state return if you take the federal standard deduction. Maryland and Virginia are examples of states that require you to take the same type of deduction (standard or itemized) on both your federal and state tax returns. As a result, you may incur a greater overall tax liability due to the differences in standard deduction levels. In other words, your state taxes may be higher than anticipated. The District of Columbia actually matches the federal standard deduction levels, so there would be no difference.

Whether you should take the standard deduction or itemize depends on your tax situation. Certain factors, such as overall income tax bracket and level of itemized deductions relative to the state’s standard deduction, will impact the outcome. Taxpayers in lower federal income tax brackets who reside in states with comparably high income tax rates and lower standard deductions will potentially see a greater state tax liability when taking the standard deduction as opposed to itemizing. This is most evident when itemized deductions are just under the federal standard deduction.

In summary, you should not assume that it’s always best to take the higher federal deduction when deciding between standard or itemized. You should take into consideration state tax implications, as well. Perform tax projections both ways to determine which deduction will yield the lowest tax liability, overall.

Meet Andrea Brashears-Lusk, CFP®.

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Information contained herein was derived from third party sources including, but not limited to, Bloomberg, Standard & Poor’s, Dow Jones & Company, the Federal Reserve Bank of New York, and Morningstar, Inc. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. We have not and will not independently verify this information. Please contact us if you would like to obtain a copy of the third party sources.