John M. Hoffman
Deduction for Sales Taxes Paid
What is the deduction for sales tax? I thought that this
deduction went away 20 years ago.
You are correct, this deduction went away long ago.
However, for select taxpayers it is back.
The concept is that people living (for example) in Florida
pay more in sales taxes as that is how the state collects revenue as they do not
have a state income tax. Other states opt to collect revenue through an income
tax. To remedy the obvious inequity of one form of state revenue collection
being deductible while another is not, the deduction for sales tax is back.
However, the deduction is a “one or the other” deduction.
Accordingly, taxpayers can deduct either their sales tax or their state income
tax, whichever is higher.
Taxpayers benefiting from
Taxpayers living in a state with no income tax but
sales tax instead – Florida, Texas, Wyoming, Tennessee, to name a few.
Taxpayers who have a one time large sales tax payment
for purchasing something like a motor home (the deduction still needs to
exceed your income taxes).
Taxpayers not paying much in state income taxes
(retirees earning state exempt pensions for example).
How do I determine my deduction? Do I need to keep every
receipt for the year?
The IRS provides a formula to estimate an acceptable
amount based on your state and your income (our software does it automatically).
You can keep all of your receipts, particularly if you have one of those big
item years (renovation of your kitchen and bathrooms). The deduction is the
formula amount plus what is paid for specific large items such as cars, boats,
and motor homes.