 Safe Harbor for certain charitable contributions made in exchange for a state or local tax credit. So if you made charitable contributions in exchange for a state or local tax credit and your charitable contribution deduction must be reduced as a result of receiving your expecting to receive the tax credit, you may qualify for a safe harbor that allows you to treat some or all of the disallowed charitable contribution as a payment of state and local taxes. Somewhat unusual of a situation, but that would usually come up in a more higher income type of situation for tax planning purposes possibly. The safe harbor applies if you meet the following conditions. You made a cash contribution to an entity described in section 170C. In return for cash contribution, you received a state or local tax credit. You must reduce your charitable contribution amount by the amount of the state or local tax credit you receive. If you meet these conditions and to the extent you apply the state or local tax credit to this or a prior year state or local tax liability, you may include this amount online 5A, 5B or 5C, whichever is appropriate. Out to the extent you apply a portion of the credit to offset your state or local tax liability in a subsequent year as permitted by law, you may treat this amount as state or local tax paid in the year the credit is applied. For more information about this safe harbor and examples, you can see Treasury Regulation 1.164-3J, US Possession Taxes. So include taxes imposed by US Possession with your state and local taxes online 5A, 5B and 5C. However, don't include any US Possession Taxes you paid that are allocable to excluded income. Tip, you may want to take a credit for US Possession Tax instead of a deduction. So now you've got this question in terms of which one would be benefiting you more, a deduction or a credit. Tax software often helps to make these kind of distinguishing questions. You probably want to run it both ways and see which would be most beneficial. If you're in that situation, you can see the instructions for Schedule 3, form 1040 line one for details. Line 5A, state and local income taxes. If you don't elect to deduct general sales tax, include online 5A, the state and local income taxes listed next. So note that when we have the taxes that were deductible for the federal income taxes, it used to be, I believe it was just the state income taxes that were deductible, which was kind of interesting because again, the states are sovereign to tax any way they want to be taxing. So when they have that law in place that really severely benefited or burdened, however you want to look at it, the states that had an income tax were the ones that are gonna benefit from that kind of situation. And if they had like some other tax system that they thought was better for their particular state, such as a sales tax, then they didn't benefit. So then they tried to adjust that so that they couldn't remove the state taxes. What they probably should have done is never have the state taxes deductible. In the first place, but they can't really remove that. So they tried to even things out by then adding the sales taxes to be deductible for the states that choose to have a sales tax. And so now we've got this system where you can deduct the state taxes and you get a benefit. If you're in a state that has the state income taxes like California, for example, then you can deduct those. And if you're in a state that has a sales tax, then you get some benefit for the sales tax. So state and local taxes withheld from your salary. Raise your salary. During 2022. So if you're in like California with a state tax, then the withholdings are gonna be much the same. They try to mirror the same structure as the federal income tax system. So for forms W2, we'll show these amounts. So forms W2G, 1099G, 1099R, 1099 miscellaneous, and 1099NEC may also show state and local income taxes withheld, however, don't include online 5A, any withheld taxes you deducted on other forms such as Schedule C, E, or F. So it's usually fairly straightforward. If you're in like California, you're gonna have the W2, for example, which will show the withholdings. So state and local income taxes paid in 2022 for a prior year, such as taxes paid with your 2022 state or local income tax return, don't include penalties or interest. Now, when I say it's pretty straightforward, I mean it's pretty straightforward with the data input. And usually when you look at the withholdings for the state, you're thinking about the state income tax return, the tax calculation, and then how much you paid. But also note that you paid that taxes out of your paycheck to the government. And that's the thing that might be deductible as a Schedule A itemized deduction if you have the capacity to take the itemized deductions. All right, once again, state and local income taxes in 2022 for a prior year, such as taxes paid with your 2021 state or local income tax return, don't include penalties or interest. So this is the other kind of funny thing. You've got this cutoff problem because it's usually gonna be determined on a cash-based system, right? So you might've made a payment for 2021 tax year for the state taxes, which you actually paid in 2022 because you owed money when you made your taxes, but you actually paid it in 2022. So you might be able to deduct that as an itemized deduction in 2022. Note that your software often is quite useful to help you with these cutoff situations as well. And it's useful to see what the software does and then deconstruct it and try to figure out, okay, are we on a cash-based or a cruel-based system? We're typically on a cash-based kind of system here. So state and local estimate of tax payments made during 2022 include any part of a prior year refund that you chose to have credited to your 2022 state or local income taxes. So now, if you had a refund in 2021, for example, and you said that you wanted to apply it to the estimated payments, so maybe you have a Schedule C, for example, and then you did your taxes for tax year 2021 by April 15th of 2022, let's say, and then you got a refund from the state and you said, okay, just take that refund and make it my first estimated tax payment, applying it to the taxes paid in 2022, well, that would be kind of like the same thing as if they gave you the refund and then you gave it back to them and said, now this is my payments for 2022, so you're paying taxes in 2022. So that might be included in itemized deductions if you're itemizing for state tax deduction. Mandatory contributions you made to the California, New Jersey or New York Non-Occupational Disability Benefit Fund, Rhode Island Temporary Disability Benefit Fund or Washington State Supplemental Workers' Compensation Fund. So mandatory contribution to the Alaska, California, New Jersey or Pennsylvania State Unemployment Fund. Don't reduce your deduction by any state or local income tax refund or credit you expect to receive for 2022 or refund of or credit for prior year, a state and local income taxes you actually received in 2022. Instead, see the instructions for schedule one. So you might say, hey, look, if I paid the tax in 2022 but then I calculated my 2022 state taxes and I'm gonna get a refund. So what is that gonna do? So now what do I have to do? Say this is my taxes that I paid in 2022 but then I'm gonna get a refund in 2023. So shouldn't I have to take that refund that I know I'm gonna get and reduce the amount that I paid by the amount that I'm gonna get refunded? And the general answer is you don't typically do that because the idea is gonna be that we just wanna keep it on a cash-based system. If you paid it in 2022, you paid it. And then when you receive the refund in 2023, well, if you got a benefit from the deduction in 2022 as we talked on the income side, then we'll include that state refund as income. So that's why when we talked about the income side, we said, if you got a refund from the state, you might have to include it in income. You only include it in income if you got a benefit from the state tax deduction in the prior year. Now you might say, hey, that leads to some shady business that can happen right there because you might say, well, I'm just gonna maximize the payments. My state taxes, I'm gonna pay a whole bunch of state taxes in 2022, lowering my taxable income in 2022. And then I'm gonna get the refund and I'll include it in 2023. So you can imagine someone trying to manipulate the system. That's the problem with a cash-based system. And of course that would only be beneficial if like 2022 was a really high income year. And you're like, I'm gonna, if it was beneficial to lower 2022 because in 2023, you're gonna have a low income year because you're not gonna make any money that year. You made all the money this year in some whatever business you're in. So you'd like to, if you had income next year, it's not gonna hurt you as much as you'd rather get the benefit this year, right? You have these timing problems. That's the problem with a cash-based type of system versus an accrual-based type of system. But the benefit is it's easy to do, right?