Feeling like shopping until you drop this holiday weekend?
Save those receipts because you might be able to deduct them on your federal income tax return for 2017 – but it may be the last year that you can take advantage of the deduction. The tax reform bill currently in Congress would eliminate the sales tax deduction, along with the state and local income tax deduction.
Not familiar with the sales tax deduction? The deduction was put in place to make up for the fact that low-to-no income tax states and local governments may raise revenue in other ways – like high or broad-based sales taxes. Tennessee, for example, has no state income tax but has a state sales tax rate is 7% but state law allows any county or incorporated city to boost the rate to close to 10%. Ditto in the no income tax state of Texas where “most goods” and some services are taxed at 6.25% with local jurisdictions (including cities, counties, special purpose districts, and transit authorities) allowed an add-on of up to 2%.
To make the tax system fair (there’s that word we keep seeing), the federal government allows taxpayers to take a deduction for sales taxes paid instead of state and local income taxes. Here’s how it works.
- To deduct any state and local taxes – whether income or sales – you must itemize your deductions. Taxpayers itemize their deductions using a Schedule A.
- If itemize and you elect to deduct state and local general sales taxes (because you can’t deduct state and local income taxes AND state and local sales taxes), you check box b on line 5.
To figure the actual amount of your deduction, you can use either your actual expenses or the optional sales tax tables.
The actual expenses method is exactly what it sounds like. You can deduct the state and local general sales taxes (including use taxes) that you paid during the tax year for your personal use (not for your business). Generally, you can only claim the deduction if the tax rate you paid was the same as the general sales tax rate. However, there is an exception for sales taxes on food, clothing, medical supplies, and motor vehicles: those are deductible as a general sales tax even if the tax rate was less than the general sales tax rate (this keeps the math relatively easy since some states have different rates for those items).
The downside of this method: you must keep your receipts showing general sales taxes paid.
If all of that seems far too complicated, you can use the optional sales tax tables method. Those vary from year to year: you can find them in the instructions for the Schedule A. They’re arranged in alphabetical order by state.
Using the tables, you’ll either complete the State and Local General Sales Tax Deduction Worksheet found in the instructions here (downloads as a PDF) or use the handy Sales Tax Deduction Calculator here.
If you lived in more than one state or locality during the tax year, you’ll have to pro-rate the allowable amount based on how long you lived there. You do this by dividing the number of days you lived there by 365. That gives you a percentage that you’ll use to calculate each state.
Here’s a quick example. Let’s say that you were entitled, using the charts, to deduct $223 when you lived in Alabama and $314 when you lived in Arkansas. And let’s say you lived in Alabama for just 40 days and lived in Arkansas for the rest of the year. The calculation looks like this:
Alabama: 40/365 = .10956 (11%). Then, $223 x 11% = $24.53
Arkansas: 325/365 = .8904 (89%). Then, $314 x 89% = $279.46
Instead of using $223 or $314 to calculate the deduction, you’d use the new, blended amount you calculated: $303.99.
Other rules and exceptions may apply (including those for military families) so ask your tax professional if you moved during the year, lived in a state that changed its sales tax rates during the year, or for more information.
And remember: this may be the last year that you can claim the deduction.
Happy shopping!
