Sales Tax Deduction Extended Through 2007

Tax Tips

Last year, did you claim your sales tax as a deduction on Schedule A?  If so, we have good news for you!  On December 20, 2006 President Bush signed the Tax Relief and Health Care Act of 2006 which extends various deductions and credits that expired on December 31, 2005.

The sales tax deduction is one of the more popular items extended. It’s been around for a couple of years and is now extended through 2007.

If you itemize deductions, you can claim a deduction for either state/local general sales tax or state/local income taxes. You can’t deduct both.

State/local income tax usually gives you a larger deduction than sales tax. However the sales tax deduction may be larger if you didn’t pay any state/local income tax, live in a high sales tax state, and/or made major purchases during the year. It’s usually the favorable choice for those taxpayers living in states like Texas and Florida.

You can claim either your actual sales tax paid during the year (you’ll need to the receipts) or use the option states sales tax table available from the IRS.  Also to the tax table amount, you can add the sales tax paid on any motor vehicle, aircraft, boat home, or home building materials if the tax rates are the same as the general sales tax rate.

The following deductions and credits were also extended through 2007:

  • Deductions
    o Educator (teacher) deduction
    o Higher education expenses (tuition and fees deduction)
    o Qualified leasehold improvements ("fast write-off" deductions)
    o New contributions to Archer medical savings accounts (Archer MSA)
  • Credits
    o DC first-time homebuyer credit
    o Work opportunity tax credit (WOTC)
    o Welfare-to-work tax credit (WWTC)
    o Indian employment tax credit
    o Increasing research activity credit

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