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Sales Tax Deduction

Sales Tax Deduction

Sales tax deduction can significantly increase your tax deductions. Even if you haven’t saved all your receipts you may still be able to claim the deduction.

Who can take the deduction?

If you file a Form 1040, and itemize deductions on Schedule A, you have the option of claiming either state and local income taxes or state and local sales taxes. You can’t claim both. If you saved your receipts throughout the year, you can add up the total amount of sales taxes you actually paid and claim that amount.

Method 1: Actual sales tax expenses

Keep all your receipts, and add up the total amount of sales tax you paid during the year. This method is requires a tremendous amount of record keeping, but could result in a higher deduction.

The actual receipt calculation might be worthwhile if you made a lot of purchases last year. Scenarios involving costly and taxable expenditures include:

  • You bought a lot of electronic equipment.
  • You moved to your first or a new home and furnished it.
  • You bought expensive jewelry, such as an engagement ring.
  • You paid for the wedding that followed that ring purchase.

Method 2: Optional sales tax tables

Use the amount provided in the sales tax calculator provided by the IRS, plus sales taxes paid on

  • the purchase or lease of a vehicle,
  • on the purchase of a boat or aircraft, or
  • on the purchase or substantial addition or renovation of a home.
  • Be careful, sales tax table

Be careful, the sales tax table amounts are based on total income, not your adjusted taxable income. You should take nontaxable income amounts into account for sales tax deduction purposes, he says, because the larger your total income, the larger your sales tax deduction.

Who should use the sales tax deduction?

The sales tax deduction is particularly useful for taxpayers in states that do not collect income taxes but do levy state sales taxes. It also could benefit taxpayers who face substantial local sales taxes. Even some residents of states with both types of taxes might find the sales tax deduction is more valuable to them than the income tax write-off.

Special rule for married couples filing separately

If you are married filing separately a special tax rule applies. Separate filers must both itemize or must both take the standard deduction. If you’re itemizing, then both of you must take either the state income tax deduction or the sales tax deduction. The tax laws don’t allow for mixing-and-matching of these deductions.

 

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