The State Sales Tax Deduction

Tax Deductions and Credits

Are you one of the lucky ones to live in a state with no state income tax? (Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington, and Wyoming in case you are planning your next move with an eye toward your tax bill).

State Sales Tax
State Sales Tax

This year, those who itemize their deductions have a choice to deduct, either the amount of state income tax paid or state and local general sales taxes paid. It’s either/or, you cannot take both. For those with a state income tax, that tax will often be far higher than the sales tax paid over the year, which is why I highlighted those states with no income tax at all.

Even if you do have a state income tax, it’s still possible that in a high spending year, perhaps including a car purchase or major remodeling along with all the high priced appliances, that the sales tax will total more than your state income tax. Either way, it’s worth taking a bit of time to see if this deduction can benefit you.

Hopefully, if you are going to use the sales tax deduction, you’ve been saving your receipts to document your total claimed sales tax. If you haven’t, or perhaps you only have the bill of sale for that new car or boat, there’s still an option for you.

You can enter your combined state and local sales tax rate and TurboTax will make the behind the scenes calculations for you, per IRS guidelines, to determine the accurate state and local sales tax deduction for you.  If you don’t know your state and local sales tax rates, TurboTax will also calculate your deduction based on just your home state sales tax rate.

One thing to note, taxpayers often think that they will be able to deduct more, because they think the deduction is their gross income times their sales tax rate, however per IRS guidelines, the sales tax deduction is a result of the sales tax rate times an amount based on your income from the IRS State and Certain Local Sales Tax Table and not your entire income.

Tax Tip:  You have the option to deduct sales tax instead of state income tax, even if you live in a state without a state income tax.

Don’t miss out!  Unless Congress extends the rule allowing the deduction of sales tax, 2011 is the last year to add it to your itemized tax deductions.