What are State Sales Taxes?

In most conversations, when we talk about taxes, we’re pretty focused on the Federal Rates, most of us painfully aware of how much of that next dollar earned will be shared with Uncle Sam.  The state income tax takes second fiddle even though it can run as high as 11% (Hawaii) for top earners.

Today, however, I’d like to discuss sales tax. You know, the extra you wind up paying at the register on most purchases. Typically, the states will charge this on non-food or drug items, although prepared foods that you eat in a restaurant or get for takeout usually are taxed as well. There was recently a bit of controversy when New York decided that a whole bagel had no sales tax, but a sliced bagel was “prepared” and therefore taxed. Some states offer small exclusions for clothing, so long as you’re buying an item below a certain cutoff, $175 in my state, there may be no tax.

The highest 5 state sales taxes are as follows:

• California – 8.25%
• Indiana – 7%
• Rhode Island – 7%
• Mississippi – 7%
• New Jersey – 7%
• Tennessee – 7%

This is state only and ignores the local taxes some cities add, or additional tax on particular transactions such as hotel room rental.

One important decision to make on your tax return, specifically, your ‘Schedule A – Itemized deductions’ is between deducting your state income tax or sales tax paid throughout the year. The lucky folk in Alaska and New Hampshire enjoy paying no state income tax and no sales tax, so that section of Schedule A comes up blank. But those in Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming all have no income tax, and therefore should take the sales tax deduction. The IRS allows you to keep all of your receipts throughout the year and claim the actual amount, or you may use the online calculator for the IRS approved amount based on your income.

Even if your state has an income tax, you may find that in a year of high spending, furnishing a new home for instance, that your sales tax deduction is still worth more than the deduction for income tax. It may be time well spend to add up all those receipts.