Sales tax deductions vs. federal income tax deductions

by Chuck November 21, 2012

sales tax deductions

sales tax deductions

If legislation passes congress again this year, a select group of federal income tax filers may benefit from calculating deductions using the state and local sales taxes they paid instead of state income taxes.

state sales tax deductions

According to the Tax Policy Center, residents of New York and California benefited the most from using the state and local sales tax deduction in 2005 on their federal income tax.

This option is only available to filers who itemize deductions using Schedule A on Form 1040, and generally only beats the income tax deduction in a few cases:

  • For residents in states with no, or limited, income taxes: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.
  • Individuals who live in states with higher-than-average state and local sales taxes.
  • Individuals who made unusually expensive purchases such as paying for a wedding, home improvements or vehicle purchases.

The IRS provides special sales tax tables that average consumption by taxpayers, taking into account filing status, number of dependents, adjusted gross income and state and local general sales rates by ZIP code. Filers using the standard sales tax deduction can also add in sales taxes paid on the purchase or lease of a vehicle, boats or aircraft, and home renovations.

Filers could optionally use the actual expense method by collecting receipts for all purchases made and keeping a running tally of all sales tax expenses. This method may be beneficial if sales taxes paid were well above the standard deduction or if the filer lived in multiple tax jurisdictions.

Filers whose sales tax deductions come out about the same as their income tax deduction may benefit from taking former since they won’t have to claim their state income tax refund the following year.

The problem with the sales tax deductions is that it never has been made permanent since it was authorized in 2004. Every two years, the issue comes up in front of legislators once again. It expired at the end of 2011, and if it isn’t renewed this year, it won’t be available to taxpayers filling out their forms in 2013.

Charles F. Spielmann

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