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Sales Tax Deduction

how to calculate sales tax deduction

By William Perez. Tax Planning: U.S. Expert

William Perez has worked as a tax professional since 2004. He earned the enrolled agent designation by passing a comprehensive examination on federal taxes and maintains his credential by taking continuing education classes.

Sales tax may be a deductible against your federal income taxes. This is an itemized deduction and is claimed on Schedule A. The sales tax deduction is available only for the years 2005 through 2014. For 2015 and later, the sales tax deduction will go away unless Congress extends this particular tax break.

The Sales Tax Deduction

In other words, taxpayers will need to choose between these two deductions. Generally speaking, the deduction works best for people who live in a state with no income tax. or whose sales tax deduction is larger than their state income tax deduction.

How Much Sales Tax to Deduct?

People can chose between two methods of calculating their sales tax deduction.

Method 1: Actual Sales Tax Expenses. Keep all your receipts, and add up the total amount of sales tax you paid during the year. This method is requires a tremendous amount of record keeping, but could result in a higher deduction.

Method 2. Optional Sales Tax Tables. Use the amount provided in the sales tax calculator provided by the IRS, plus sales taxes paid on

  • the purchase or lease of a vehicle,
  • on the purchase of a boat or aircraft, or
  • on the purchase or substantial addition or renovation

    of a home.

There's a worksheet in the Instructions for Schedule A (pdf) to help you keep track of these figures.

Tax Planning using the Sales Tax Deduction

People who claim the sales tax deduction don't have to report any state income tax refund as taxable income in the following year.

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So if your sales tax deduction is about the same as your income tax deduction, you'll probably come out ahead by taking the sales tax deduction. See the Recoveries section of Publication 525, Taxable and Nontaxable Income. on the IRS Web site for more details about how state tax refunds are taxed.

Record Keeping for the Sales Tax Deduction

Keep receipts showing sales tax paid for cars, boats, airplanes, and home improvements if you are using the optional sales tax table method.

If you're using the actual expense method, keep all receipts for purchases you made. To make things easier, you may want to keep track of your purchases using personal finance software so you can keep a running tally of your sales tax expenses.

Special Rule for Married Couples Filing Separately

People who file using the married filing separately status need to be aware of a special tax rule. Separate filers must both itemize or must both take the standard deduction. If you're itemizing, then both of you must take either the state income tax deduction or the sales tax deduction. The tax laws don't allow for mixing-and-matching of these deductions.

Category: Taxes

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