The Sales Tax DeductionIndividuals can deduct either state and local income taxes or sales taxes paid during the year. 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.
Tax Planning using the Sales Tax DeductionPeople who claim the sales tax deduction don't 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, you'll probably come out ahead by taking the sales tax deduction. See the Recoveries section of Publication 525 from the IRS for more details about how state tax refunds are taxed.
Record Keeping for the Sales Tax DeductionKeep 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.