If you ever itemize your deductions, you might’ve come across the sales tax deduction. This is part of the broader State and Local Tax (SALT) deduction and allows you to deduct either state and local sales tax or income tax paid during the year from your federal taxable income. By reducing your taxable income, you could potentially lower your overall federal tax liability. With the passage of President Trump’s One Big Beautiful Bill in 2025, important changes to the SALT deduction cap have taken effect, making this benefit more valuable for some taxpayers.
Sales Tax vs. Income Tax
When claiming the SALT deduction, you must choose between deducting state and local sales tax or state and local income tax. You can’t deduct both.
If you choose to deduct sales tax, you can use either actual amounts paid throughout the year (which requires detailed receipts) or an estimated amount calculated using the IRS’s sales tax deduction calculator or worksheet.
If you choose to deduct state and local income taxes, this typically includes:
- Income tax withheld from your paychecks
- Estimated tax payments to state and local governments
- Any state or local income taxes paid this year for a prior year
- Mandatory contributions to certain state benefit funds (varies by state)
It’s often worth calculating both options to determine which provides the greater deduction.
Items to Consider When Choosing Which Tax to Deduct
If you’re unsure which option is best, there are a few things that can make the decision an easier one.
Understand State Residency
If you live in a state that doesn’t impose an income tax, your choice is simple: deducting sales tax is your only option. These states include: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
On the flip side, a few states don’t impose a sales tax (such as Alaska, Delaware, Montana, New Hampshire, and Oregon), making the income tax deduction the likely winner if you itemize.
Consider Your Recent Life Changes
Your decision may vary from year to year depending on your spending or income. For instance:
- If you recently purchased big-ticket items like furniture, appliances, or a new vehicle, deducting sales tax may give you a larger benefit.
- If you received a raise, bonus, or had a high-income year, your state income tax payments might be higher, making that deduction more beneficial.
Know the Limits
One of the most significant updates under the One Big Beautiful Bill (OBBB) is a temporary increase in the SALT deduction cap:
For tax year 2025:
- The SALT deduction cap has increased to $40,000 for married couples filing jointly (MFJ).
- For married filing separately (MFS), the cap is $20,000.
These limits apply to the total combined amount of:
- State and local income or sales taxes, and
- Property taxes
Beginning in 2026, the cap increases by 1% annually through 2029 to keep pace with inflation.
However, there is a phaseout for high-income earners:
- If your Modified Adjusted Gross Income (MAGI) exceeds $500,000 (MFJ) or $250,000 (MFS), your SALT deduction begins to phase down.
- Specifically, the cap will be reduced by 30% of the amount by which your income exceeds the threshold, until the cap returns to $10,000 (MFJ) or $5,000 (MFS).
This means that for high earners, the benefit of the increased SALT cap may be limited or eliminated depending on income levels.
How to Claim the Sales Tax Deduction
To take advantage of the sales tax deduction:
- Keep detailed records in case of an audit, especially if you’re claiming actual sales tax amounts.
- You must itemize your deductions using Schedule A of your tax return (Form 1040).
- Report the total amount of state and local taxes paid—whether income or sales tax, but not both.
- Use the IRS Sales Tax Calculator if you don’t have documentation for your actual purchases.
Conclusion
The sales tax deduction, part of the larger SALT deduction, offers taxpayers an opportunity to lower their federal tax burden, particularly when itemizing makes more sense than taking the standard deduction. Thanks to the 2025 One Big Beautiful Bill, many households will enjoy a higher SALT deduction cap for the next several years, with inflation indexing and new phaseout rules based on income. Still, the choice between sales tax and income tax deductions requires careful consideration. Your residency, recent spending, income levels, and tax filing status all play a role. As always, consult a trusted tax professional or use IRS tools to ensure you’re maximizing your deduction and complying with current tax law. Optima Tax Relief is the nation’s leading tax resolution firm, helping individuals and businesses navigate complex tax issues with confidence.
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