NM Taxation & Revenue Department Clarifies
State Income/Sales Tax Itemized Deduction Add-Back

The Taxation and Revenue Department recognizes that the new requirement to add back state and local income or general sales tax deducted on tax year 2010 returns may cause confusion for some taxpayers. This bulletin explains the Department’s interpretation of that statute and the policies that will be followed in its implementation. The new requirement, approved last year as part of Laws 2010 (Second Special Session) Chapter 7, Section 7, amended the definition of “net income” under the income tax act to require taxpayers to add back their itemized deduction for state and local income and sales taxes that are deductable under federal law. Although the 2010 Form PIT-1 was designed following the law as written, both the statute and the form leave uncertainty about how to handle situations in which a taxpayer’s itemized deductions after the add back are less than their standard deduction. The Department’s interpretation is that the taxpayer should be allowed to take the standard deduction in that case, even if the taxpayer claimed itemized deductions for federal income tax purposes. This treatment is consistent with the interpretation that has always been applied to the statutes governing the use of itemized and standard deductions. The Department has implemented system changes to insure this treatment as the income tax returns are processed.

A taxpayer who itemizes deductions on the 2010 federal income tax return is required by the new statute to add back the amount of state and local income or general sales tax deduction claimed on line 5, federal Form 1040, Schedule A. Under the Department’s interpretation, a taxpayer should not reduce the deduction amount below the standard deduction amount that you would have qualified for had you not elected or been required to itemize on the federal return.

- itemized their federal deduction amount, and
- who have a state and local income or general sales tax deduction on line 5, federal Form 1040, Schedule A, that reduces the itemized deduction amount below the standard deduction amount that they would have qualified for had they not elected or been required to itemize on the federal return.

The Department will adjust the state and local income or general sales tax deduction amount reported on line 8, Form PIT-1, if the result of subtracting that amount from the itemized deductions reported for the taxpayer on line 10, Form PIT-1 is less than the standard deduction amount that would be allowed on the federal return for that taxpayer. Taxpayers should not make adjustments to the itemized deduction amount reported on line 10, Form PIT-1. The amount on line 8, Form PIT-1 must be adjusted.

To make the necessary adjustment to Form PIT-1, you should:

- On line 10, Form PIT-1, you must enter the itemized deduction amount exactly as it is entered on Federal Form 1040, do not alter or adjust this amount;
- On line 10a, Form PIT-1, mark the box indicating that the taxpayer itemized the federal deduction amount,
- On line 8, Form PIT-1, enter the amount from line 5 of the following worksheet.
- Complete the remainder of the PIT-1 return as instructed.

Worksheet to compute the amount to be entered on line 8, Form PIT-1.