Deducting Sales Tax as Itemized Deduction on Federal Tax Return

How do you deduct sales tax on a federal tax return?

Taxpayers might have the option to deduct state sales tax that they have paid during the tax year. This might be very useful to taxpayers who would like to deduct sales tax paid on a new car. Sales tax on a new car is often a large amount and taxpayers have decent records to substantiate this claim with the IRS.The sales tax deduction was extended again in legislation H.B. 5771 (section 105) signed by President Obama on December 19, 2014. Congress let sales-tax deductions expire in 2007, 2009, 20011, 2012 and 2013, only to renew it retroactively months or even a year later.

Deducting Sales Tax as Itemized Deduction on Federal Tax Return

If you file a Form 1040, and itemize deductions on Schedule A, you have 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.

 

Deducting Sales Tax

Remember though that deducting sales tax is not available to all taxpayers. You must choose between the deduction for your state income tax payments and deducting sales tax, but you can never take both on your Schedule A. This also assumes that the taxpayer will be itemizing their returns which is something that not all taxpayers do. In addition, the sales tax deduction is available between 2005 through 2013. Beyond 2014, the sales tax deduction might go away unless Congress chooses to extend the sales tax tax deduction.

People who claim the sales tax deduction, maybe on a new car purchase, do not have to report any state income tax refund as taxable income in the following year. So if your sales tax deduction is about the same as your income tax deduction, most taxpayers are better off taking the sales tax deduction.

 

Deduct Sales Tax or Income Tax

For most people, the state and local income taxes paid usually gives them the higher deduction on their federal tax returns, but for some taxpayers, the sales tax deduction may give them a greater benefit. Below are special instances when taxpayers may be better off taking the sales tax deduction.

  • Residents of states that don not collect state and local income tax (Alaska, Florida, Nevada,  South Dakota, Texas, Washington, and Wyoming)
  • Taxpayers who made major purchases during the tax year that were subject to sales tax. Some examples might include cars, boats, and airplanes.
  • Residents of states with a high sales tax rate than income tax rate.

 

IRS Sales Tax Calculator

The IRS has posted tables for each state estimating how much someone might have in a sales tax deduction. However, if you paid a greater amount, you will be able to deduct that larger amount if you documentation to support your claim.

 

Using IRS Sales Tax Calculator

The IRS also have a tool that is used to calculate the amount of sales tax paid. It is called the IRS Sales Tax Calculator. To figure the amount of optional general sales tax you are eligible to claim, just answer a few online questions and the system does the rest. First select the tax year for which you are preparing a return. Then, using your ZIP Code and just a few entries from your draft Form 1040, the Sales Tax Deduction Calculator will automatically figure the amount of state and local sales tax you can claim. Your entries are anonymous and the information is collected solely to allow you to determine your total allowable deduction.

 

IRS Information on Sales Tax Deduction

The deduction is available to taxpayers that itemize deductions, not those who take the standard deduction. The deduction is based on adjusted gross income and number of exemptions claimed. Taxpayers who keep all their receipts can deduct actual sales tax and use tax paid. For taxpayers who didn’t keep receipts, the IRS has an online Sales Tax Deduction Calculator to determine the amount of optional general sales tax to claim, or taxpayers can use the Optional State Sales Tax Tables.

Who should deduct sales tax on tax returns?

For most people, the state and local income taxes paid usually gives them the higher deduction, but for others, the sales tax deduction may give them a greater benefit, for example:

  • Residents of states that don’t collect state and local income tax (Alaska, Florida, Nevada,  South Dakota, Texas, Washington, and Wyoming)
  • Taxpayers who made major purchases during the tax year that were subject to sales tax (we’re talking major as in cars, boats, airplanes, RVs, etc.)
  • Residents of states with a high sales tax rate.