Deducting State Sales Tax

The state sales tax deduction was extended in 2010, but may not be available for 2012

One of the many deductions built into our tax code is the ability to deduct state and local income taxes. Some states, however, don’t have an income tax. They fill their coffers with a large sales tax instead. To make it fair to people in these states, Congress introduced the ability to deduct state and local sales taxes instead.

You can deduct state and local income taxes or state and local sales taxes, but not both.

Generally, if you live in a state that has income tax, it’s more beneficial to deduct that. And if you live in a state without income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, just for the record) it makes sense to deduct sales tax instead. And even if you do live in a state with income tax, it might make sense to deduct sales tax if you bought a particularly expensive item during the tax year.

If you do deduct sales tax, you can either deduct the actual amount of sales tax you paid, or a general amount that the IRS calculates. Let’s unpack these two options a little more.

1. The first is pretty straightforward – deduct the actual amount of sales tax you paid. In order to do this, however, you have to save all of your receipts and add up the sales tax when it’s time to do taxes. Then, of course, you need to keep the receipts in case you get audited by the IRS. The upside: this amount could potentially be more than the amount the IRS gives you. The downside: it’s extremely time consuming, and might not even end up saving you any money.

2. The second option is the one that most taxpayers go for. Instead of deducting the actual amount, you can deduct the amount given to you by the IRS’s Sales Tax Deduction Calculator. The amount the calculator comes up with is dependent on the tax year, your ZIP code, and a few other pieces of information from the 1040 you’re working on.

For the really hardcore do-it-yourself tax preparers out there, you can use the State and Local General Sales Tax Deduction Worksheet in the instructions for Schedule A. But, I highly recommend using the online calculator. Not only is it faster and easier, but it also includes local sales tax information that the paper worksheet lacks.

Keep in mind: even if you use the calculator or the worksheet, you can still claim sales tax on certain big-ticket items in addition to the normal number, including motor vehicles, aircrafts, boats, homes, and substantial additions or major renovations to a home.

As of now, this deduction is available for 2005-2011 taxes, but is set to expire starting with the 2012 tax year, unless Congress votes to extend it later this year. So if you still have to file past year taxes, be sure to take advantage of it.

Photo via I See Modern Britain on Flickr.

This entry was posted on Thursday, September 20th, 2012 at 5:46 pm and is filed under Tax Deductions and Credits. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.