Sales tax deduction: What it is and how to take advantage of it
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What is the sales tax deduction?
The sales tax deduction gives taxpayers the opportunity to reduce their tax liability when they deduct state and local sales taxes or state and local income taxes that they paid in 2021 — but not both together.
Taxpayers who might benefit from the sales tax deduction include those who:
- Live in states with no income taxes.
- Made large purchases or renovations during the tax year.
- Determine they can lower their tax bill by itemizing deductions, rather than taking the standard deduction.
State and local real estate and personal property taxes can be deducted in addition to either the state income or sales tax deduction.
The deduction for state and local income taxes has been around since federal taxes were first introduced in 1913. The state and local sales tax deduction came about nearly 30 years later, but the rules for taking this deduction have changed many times over the decades.
The latest changes, signed into law in late 2017 via the Tax Cuts and Jobs Act, limit the deduction to no more than $10,000, regardless of whether the taxpayer claims state income or state sales tax. Previously no cap was imposed. So if, for example, your sales taxes in 2021 amounted to $3,000 and your property tax was $11,000, you can only deduct $10,000, period.
That limitation applies to each return, so married couples filing jointly also must abide by the $10,000 cap. Married persons filing separately can each get a $5,000 deduction, but both must agree to use the same method for deducting sales taxes.
What’s deductible for tax year 2021?
If you are a single filer, the standard deduction in 2021 is $12,550. If you are filing jointly with your spouse, the deductible is $25,100. This is a raise from $12,400 and $24,800 respectively, which were the standard deductions in the tax year 2020.
The IRS allows you to deduct the actual sales taxes you paid, as long as the tax rate was no different than the general sales tax rate in your area. Exceptions are made for food, clothing and medical supplies.
Actual sales taxes on these items are deductible even if consumers paid less than the general sales tax rate on these items. If you paid sales taxes for big-ticket items, such as an engagement ring, wedding expenses, electronic equipment, furnishings for a new home, etc., these can be counted if you tracked all your purchases and sales taxes paid during the course of the year.
If you didn’t keep track of all your purchases and have no idea how much you might have spent on sales tax, the IRS has a solution for you. The agency provides optional state sales tax tables based on each state’s sales tax rate, your family size and your income level.
In addition to the sales tax amounts provided in the table, taxpayers may add actual sales taxes paid for specific items. For example, sales taxes paid for motor vehicles can be deducted up to the amount of the state and local sales tax rate, but not higher. Allowable sales tax deductions for motor vehicles and other large purchases include the following:
- Cars, SUVs, trucks, vans.
- Motorcycles.
- Motor, mobile or prefab homes.
- Materials to build or renovate a home.
- Recreational vehicles.
- Off-road vehicles.
- Aircraft.
- Boats.
Taxes spent on leased vehicles can also be deducted. Don’t include sales taxes paid in relation to your trade or business, or if you’ve already received a refund for the sales tax in the year you paid it.
How to decide which deduction to take
First, decide whether to take the standard deduction or whether to itemize deductions. If you choose to take the standard deduction, then you can’t itemize deductions, including the sales tax deduction.
For the tax year 2021, the standard deduction amounts are generous:
- $12,500 for individuals and married couples filing separately.
- $25,100 for married couples filing jointly.
- $18,800 for heads of households.
If you tally up your itemized deductions and they don’t exceed the standard deduction amount, you’re better off not itemizing at all. Expenses that can be itemized include charitable contributions, personal casualty and theft losses from a federally declared disaster, mortgage interest, and medical and dental expenses that exceed certain thresholds.
If itemizing proves to be the better course of action, taxpayers then must choose between taking the state and local income tax deduction or the sales tax deduction. People typically pay more in state income taxes than state and local sales taxes, but it pays to total both types of expenses and compare them to make sure. For those who live in states with no income tax, it’s a no-brainer to take the sales tax deduction. Residents in states with no sales tax likely would fare better by taking the income tax deduction.
Steps to claim the sales tax deduction
Here are the steps you should take to claim the sales tax deduction.
- Use Schedule A: The form Schedule A is used for making itemized tax deductions. Near the bottom of the instructions in this form are the optional state sales tax tables formulated by the IRS. At the very bottom is another table for local sales tax. The worksheet in those instructions also helps you calculate the tax under different scenarios, such as if you lived in different states or if the local tax rate changed during the course of the year.
- Use the IRS calculator: You can either save all your receipts from every purchase throughout the year or you can use the calculator provided by the IRS to estimate the sales tax deduction. Generally, the official IRS estimator can save you a lot of work and also get you quite a large deduction.
- Identify correct income level: If you use the optional state sales tax tables provided by the IRS, be sure to consider all forms of income that you took during 2021 to identify your correct income level. For example, add up your non-taxable income such as Roth IRA distributions, tax-exempt interest from municipal bonds, veterans’ benefits, the non-taxable portion of Social Security and pension or annuity payments and other such payments. Generally, the higher your income, the more you paid out in sales taxes, and the IRS tables reflect this trend.
- Don’t forget the major purchases: In addition to the IRS’ estimate of sales taxes you paid in your state, don’t forget to add the sales taxes you paid for the allowable large purchases made during the year, such as a car, boat, or a house. More details are provided in the instructions for Schedule A.
Bottom line
The IRS expects that you’ll take full advantage of every deduction available to you. If you determine that itemizing expenses is your best option, consider taking the state and local tax deduction that offers the bigger tax break. If you take the sales tax deduction, be sure to keep your receipts for the big-ticket items you bought and, if you’ve taken the trouble to track actual sales taxes paid in 2021, keep all your sales receipts handy in case of an audit.
The $10,000 cap on taking the state and local tax deduction is set to expire after the 2025 tax year, though Congress may act to renew, eliminate or increase it at any time.
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