Some States Will Take the Fun Out of Tax Rebates
Some states allow residents to deduct federal tax payments from their state taxable income, so as the federal tax goes down, the state tax will increase, thus creating a tax on the rebate.
According to the Federation of Tax Administrators, the states where the potential tax on federal tax rebates may occur include:
The tax on the federal rebates may only amount to $10-$15, so taxpayers may not be too concerned about this situation. Iowa Governer Tom Vilsack plans to study the matter before making a final decision about taxation of the rebates.
The rebate was announced only recently, so most states probably haven't had time to consider how to treat the issue.