How to Use the Sales Tax Deduction

Paying taxes is something most Americans loathe, partly because the tax laws tend to be complicated and partly because, well, paying taxes just isn’t fun. Lowering the amount of taxes you owe the IRS makes it a little less painful however. That’s where the sales tax deduction comes in.

Which States Have a Sales Tax?

It is easiest to answer this question by listing those states that do not have a sales tax; there are only five.

Is it better to claim state sales tax or federal income tax?
  • Alaska
  • Delaware
  • Montana
  • New Hampshire
  • Oregon

Of these five states, Alaska and Montana do allow localities to charge sales taxes. That means that more than 97% of Americans are paying some sort of state sales tax.

Who Qualifies for the Sales Tax Deduction?

The IRS allows taxpayers that itemize their deduction 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.

The sales tax deduction can specifically benefit 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.

While it is true that most people typically pay more in state income taxes than in state and local sales taxes, we suggest you check into it anyways. Depending on your state's income tax rate and how much you made (and paid), your sales tax amount could be greater than the state income tax you paid.

Should You Claim Income Taxes or Sales Taxes?

To take advantage of the sales tax deduction you need to answer two questions.

  1. Do you plan to itemize your deductions?
  2. If so, which method yields a higher deduction: state income tax or sales tax?

Once you have determined that you are better off claiming itemized deductions and using the sales tax deduction, you are now clear to calculate the amount of the sales tax deduction.

If you have the proper documentation, there is no limit on the deduction amount.

Even if you don't have all your receipts, you still might be able to re-create many of your sales tax payments. For example, many types of records, such as credit card statements, are available online. By accessing them, taxpayers could improve the accuracy of their annual sales tax computations.

Could the sales tax deduction save you more than the federal income tax deduction?

Keep in mind that the actual receipt calculation can be proven to be worth your time, specifically if you made a lot of purchases during the year.

Here are a few examples that may be applicable to you:

  • You bought a new car, a boat or motor home.
  • You remodeled your home and refurnished it.
  • You bought electronic equipment such as TV’s, computers, etc.
  • You bought expensive jewelry, such as an engagement ring.
  • You paid for the wedding that followed that ring purchase.

Most taxpayers will probably claim the amount that the IRS has figured for them in special sales tax tables; one for each applicable state. The deduction amounts are based on the average consumption by taxpayers, taking into account filing status, number of dependents, adjusted gross income and rates of state and local general sales taxation.

The IRS tables with standard sales tax deduction amounts can be found in the Schedule A instructions. The IRS offers a sales tax deduction calculator to help taxpayers determine the amount of taxes they are eligible to claim.

As always, OTA Tax Pros is here to help if you’d like more information and help on the sales tax deduction.

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