Is the State Sales Tax Deduction a Better Alternative for You?

Here's a tax-related post from Suze Orman that highlights some facts around the deductibility of state sales taxes on your federal income taxes. The details:

According to a recent government study, an estimated 2.1 million taxpayers didn't take advantage of a valuable tax deduction last year: the ability to deduct either state income tax or state sales tax from a federal tax return. If you happen to live in one of the seven states that doesn't levy income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no income tax, while New Hampshire and Tennessee tax only dividend and interest income), it makes tremendous sense to file an itemized return and deduct state sales tax paid.

Even if you live in a state with a low income tax rate, I'd urge you to at least compare your potential savings from claiming the sales tax deduction rather than the income tax break. Of people who did claim the sales tax deduction, the average deduction last year was $1,718. That's a big savings.

As Suze notes, unless Congress extends the sales tax deduction option, it'll disappear after Dec. 31, 2007. That said, you may want to calculate your 2007 returns both ways -- comparing the sales tax deduction to your state income tax -- and see if you'd be better off financially claiming the state sales tax.

For me, the income tax in Michigan is at a pretty good level and I have a decent income, so I'd really have to buy a lot in a year to beat the cost of my state income tax. That said, it's something my accountant always looks at just in case.

Comments

[thomas]

I live in one of those states, but I'm in no way disciplined enough to save my receipts to calculate sales tax for the year.

[Chuck Vitello]

Is it really necessary to calculate each and every sales receipt? I thought that there is a formula for doing this? Also, when will be get a definite answer if and when congress extends this deduction?

[Ann]

The tables for state sales tax are on page A-11 in the 2007 Instructions for the Form 1040. I spend frugally, so I have found the allowed standard rates are larger than what I would have from the actual receipts.
So no need to keep the receipts....
Turbo Tax figures your deduction both ways automatically---income vs sales tax.

[Anitra]

There's no sales tax in New Hampshire, so I don't think this advice will help them.

[Kevin]

The IRS also has a calculator on their website. Just punch in your ZIP code, AGI and a few other things and it will give you your sales tax deduction. Compare it to your state taxes paid for the year and deduct the larger of the 2...easy as pie! Of course, most good CPAs (and software) does this automatically. No need to keep all those receipts....

Unless you buy something large like a boat or car for example. You can add the sales tax paid on those big ticket items to the deduction computed via the IRS tables or website.

[Adam]

There are two accepted methods for calculating sales tax. (See IRS Pub 600)

The first is the long arduous road of collecting receits and keeping very good books. You can deduct the general sales tax for anything you bout for you own personal use (not business or trade use) if it was taxed at the general sales tax rate. If the item was not taxed at the general sales tax rate it can ony be claimed if it was food, clothing, medical supplies, or a personal vehicle.

The second is the optional sales tax tables and worksheet. This method allows you to claim sales tax for all those receits you didn't keep and, in addition, allows you to claim sales tax on certain major purchases (home, car, aircraft, or boat)

Now if you received a refund of sales tax in the prior year (recieved a refund in 2006), this may be used to offset your current tax year sales tax deduction (See IRS Pub 525 Recoveries, pages 20-21)

The second method is the most commonly used method though rarely generates a higher deduction than claiming State Income Tax. I would try to explain the Pub 525 concerns, but I need to look into them a little further to fully understand them (or to make sure I didn't make a mistake on my return last year).

[Adam]

One thing I forgot, if you don't have many other itemized deductions, it may not be worthwhile to claim the sales tax or the income tax since the total itemized deductions may not be as much as the allowed standard deduction.

[SavingDiva]

There is no way that my sales tax would be more than my state taxes. I guess I don't make very much money and I spend my money on things that don't have sales tax---rent, food, etc.

[Erica]

Does anyone know what tax on a hotel room is deductible sales tax? I did save all my receipts and am totaling my actual sales tax (I am fairly young and am in more of a consumption mode than a savings mode; the last couple years I have greatly exceeded the estimated sales tax) (I live in a state with no income tax). So I am totalling up my receipts and I have several hotel bills with taxes listed on them (about $300 worth of taxes). All trips were personal (not business). Can I deduct all the tax listed on the bill, or is only a portion sales tax, or is none of it sales tax?

[Nina]

I bought a car in 2007 for $25,000 and made $5000 down payment. Should I take sales tax on the whole amount or only at dowm payment.
Thanks in advance for reply

[Ben]

Do credit card statements count as valid proof for the state sale tax deduction? Or do you need the actual receipts from all the purchases?

[Chris Keller]

I rent a house in Florida every winter from a real estate compnay. The cost is abount $11,000. But the tax is around $1,000 bringing it to $12,000. Part of this is the Florida State tax and Monroe county tax which total 7.5% equals $750. Can I take this as a state tax deduction on my Federal taxes?