On a similar note...
On a similar note...
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What is the sales tax deduction?
On your tax return, you can deduct the state and local general sales tax you paid during the year, or you can deduct the state and local income tax you paid during the year. You can’t do both.
Here’s how the sales tax deduction works and how you can determine the best route for you.
In general, the IRS lets you deduct one of the following:
Your state and local general sales tax, or
Your state and local income tax
State and local general sales taxes generally include either:
Your actual sales tax expense on purchases, which can mean meticulous record-keeping, or
An estimate of what you paid, which you can calculate using the IRS’s sales tax worksheet and tables.
State and local income taxes generally include:
State and local income taxes withheld from your wages
Estimated income taxes you paid to state or local governments during the year
State and local income taxes you paid during the year that were actually for a prior year
Mandatory contributions to state benefit funds that protect against lost wages (certain states only)
How to take advantage of the sales tax deduction
Compare what you paid in sales tax for the year to what you paid in state, local and foreign income tax for the year. Then deduct the larger of the two amounts.
Reid Riker, a certified public accountant at Evans, Nelson & Company in Reno, Nevada, says these things can speed up the decision.
Look at where you live. If you live in a state that doesn’t have a sales tax, then the income tax deduction is probably for you. The same goes for people in high income-tax states, Riker says. “By and large, for most large-income earners in states such as California or New York or other states that have state income tax, you usually find that it's better for folks to take the state income tax deduction because it's usually larger,” he says. Conversely, if you live in a state with no income tax, the sales tax deduction will probably be the better choice.
Reflect on your life. Sounds serious, but all this means is that if you recently made some big purchases — new appliances, a car, travel or lots of furniture, for example — you may have paid a lot of sales tax during the year. That could easily swing the pendulum in favor of taking the sales tax deduction. Likewise, if you started making a lot more money, you may have paid a lot more state income tax during the year, which means deducting your state and local income taxes might be the better choice.
Take charge of your financial life right now
Beware the catch. Your deduction of state and local income taxes, sales taxes and property taxes is capped at $10,000 ($5,000 if married filing separately). So if you’ve been itemizing your tax return and you live in a state with high income taxes or you own a house in an area with high property taxes, there may not be much room for this deduction.
How to claim the sales tax deduction
Use Schedule A when you file your tax return. Schedule A is where you figure your deduction. (You’ll need to do this if you take the income tax deduction, too.) Either way, this means you’ll need to itemize your taxes instead of taking the standard deduction. It’ll probably take more time to do your taxes if you itemize, but you could end up with a lower tax bill. (Go here for help deciding whether to itemize.)
Think about using the IRS’s official estimator. There are two ways to calculate your sales tax deduction:
Pull your hair out trying to find receipts for everything you bought during the year, so you can add up the sales tax, or
Just estimate what you paid by using the IRS’s sales tax tables, which you can find in the instructions to Schedule A. You can also use the IRS’s sales tax deduction calculator. “My advice to the receipt-keepers is, if you have a normal year as far as purchases … you don't need to keep the receipts and you can just use the IRS sales tax calculator; it'll still give you a pretty handsome deduction,” Riker says. Plus, the receipt-keeping method rarely bests the IRS estimation method. “Usually people come out better with the general tax calculator,” he says.
Sometimes you can have it both ways. You can use the IRS estimation method and then add the sales tax you paid on certain big purchases, such as a car, boat or home improvements (the Schedule A instructions detail the rules). In those cases, it really can pay to keep those receipts — they might pad your deduction, Riker says.