As part of the state and local taxes (SALT) deduction you may be able to deduct certain taxes you paid throughout the year on your federal personal income tax return (form 1040, schedule A, line 5) . The deduction is available only if you itemize. For years 2018 through 2025 the Tax Cuts and Jobs Act (TCJA) limits the SALT deduction to $10,000 ($5,000 for married taxpayers filing separately).
If you choose to take advantage of the SALT deduction you can calculate it by summing up the following taxes:
- your state and local real and personal property tax, PLUS
- your state and local income tax OR sales tax (but not both).
For purposes of this post we will focus only on the second part of the deduction – the choice between including your state and local income tax or sales tax (highlighted in the graphic above).
When Should You Choose to Deduct Your Sales Tax Instead of Income Tax?
Most of us pay more in state and local income tax rather than sales tax. For that reason most of us would receive a bigger SALT deduction by including income tax rather than sales tax. However, that is not always the case. In the circumstances below you may benefit from deducting sales tax instead of income tax.
If You Live in a State that Doesn’t Impose Individual Income Tax
If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming and you paid less than $10,000 in property taxes it’s a no brainer that you should deduct the sales tax you paid. You can deduct your actual sales tax paid if you kept receipts for all of your associated purchases. If you didn’t keep your receipts, don’t worry, you can estimate the tax paid (more on that below).
If You Purchased High-Ticket Items During the Year
If you purchased a car, truck, motorcycle, motor home, boat, aircraft, or materials to build a home the sales tax you paid during the year may exceed the income tax you paid. For high-ticket items like these you will actually need to save your receipts.
If the Sum of Your Property and Sales Taxes Exceeds $10,000
Even if the sales tax you paid is less than the income tax you paid, but the sum of your property and sales tax exceeds $10,000, you may consider deducting sales tax instead of income tax. This is preferable since the following year you wouldn’t have to include any portion of your state income tax refund in your income. The only exception here would be if you received a sales tax refund which you had previously deducted for income tax purposes (a very unlikely scenario).
If Deducting Sales Tax Instead of Income Tax Lowers Your State Income Tax Liability
Deducting sales tax instead of income tax may also result in lower state income tax liability. Many states piggyback off of the Federal tax return calculation. They may use certain key lines from it (such as line 7, adjusted gross income) as a starting point for the state tax calculation, to which the state may add back items such as the state income tax deduction. In these cases deducting state sales tax instead of income tax will lower the state income tax you owe.
How Can You Estimate the Sales Tax You Paid if You Didn’t Save Your Receipts
If you are like most of us, it’s unlikely that you kept receipts for all of your purchases. Luckily IRS allows you to deduct an estimated amount of your sales taxes paid, which you can obtain by using the sales tax tables provided by the IRS or their handy sales tax calculator. It estimates the amount based on your residence location, income, and family size. After you determine your estimated sales tax paid amount you can add to it the actual amount of sales tax you paid on your “big ticket” items (such as your car or your boat).
A Few Words of Caution
Make sure that the sales tax you claim as a deduction meets the following conditions:
- You have actually paid the tax in the year in which you are trying to deduct it. If you merely received a bill in the current year for the item purchased and paid it in the following year you (as a cash basis taxpayer) are not entitled to deduct the sales tax in the current year.
- The sales tax on your big ticket purchase receipts must be separately stated and paid by you. This might be an issue for you if you are trying to deduct sales tax paid on building materials and the tax is not itemized on the receipt or was paid by your contractor instead of you (unless your contractor is an agent acting on your behalf).
- You can only deduct sales taxes imposed at the general sales tax rate for the state, unless the item taxed is food, clothing, medical supplies, or a vehicle).
If you have questions about any of the items discussed in this post, you can reach me at Antoaneta@antoanetaarchercpa.com.
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Disclaimer
This post is for general discussion purposes only and does not constitute tax or legal advice. If you need help with a tax issue please contact us so that we can assist you based on your specific facts, circumstances, and time periods involved. I am not an attorney and do not give legal advice. For legal questions please refer to a tax attorney.