If you ever itemize your deductions, you might’ve come across the sales tax deduction. This is part of the Sales and Local Tax (SALT) deduction and allows you to deduct state and local sales tax paid during the year, or state and local 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. Here’s when and how to take advantage of the sales tax deduction.
Sales Tax vs. Income Tax
If you decide to claim the sales tax deduction, you’ll first need to decide if you’ll deduct state and local sales tax or state and local income tax paid during the year. You may only choose one. If you choose to deduct state and local sales tax, it will typically include actual sales tax paid on purchases or an estimate of what you paid using the IRS’s worksheet or a sales tax calculator. This will require very detailed record-keeping.
If you choose to deduct state and local income taxes, you’ll be able to deduct state and local income taxes withheld from your paychecks, estimated tax payments made to state and local governments, and state and local taxes paid this year for a previous year. In addition, some states allow you to deduct any mandatory contributions to state benefit funds. It might be best to calculate both scenarios and choose to deduct the larger of the two.
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 does not impose an income tax, the decision is practically made for you. In other words, opting to deduct state and local sales tax is the only option. These states include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Alternatively, there are some states that do not impose a sales tax. These include Alaska, Delaware, Montana, New Hampshire, and Oregon. If you live in a state with both sales and income taxes, then you should consider how much you pay for each.
Consider Your Recent Life Changes
The decision of which deduction to choose may not be the same each year. For example, if you recently purchased a home and bought all new appliances and furniture, it might be a good idea to deduct sales tax. The same is true if you recently purchased a new car or traveled. On the other hand, if you just received a big promotion, you’re likely paying much more in state and local income taxes, which might make this deduction the better option.
Know the Limits
Whichever option you choose, there will be limits to how much you can deduct. In 2023, this limit is $10,000, or $5,000 for married couples filing separately. This includes property taxes, plus state and local sales taxes or state and local income taxes.
How to Claim the Sales Tax Deduction
To claim the sales tax deduction, you’ll need to itemize your deductions instead of taking the standard deduction. You’ll do this with Schedule A and include the total amount state and local sales tax or income tax paid during the year. Be sure to use the IRS’s free online tools and calculator for help.
Sales tax donations provide a unique opportunity for individuals to reduce their tax burden. However, eligibility for claiming these deductions requires careful consideration of factors such as itemizing deductions, the state and local tax deduction limit, documentation, and the nature of eligible purchases. If you’re considering utilizing this deduction, it’s essential to be well-informed and, when in doubt, seek guidance from tax professionals to ensure compliance with current tax laws and regulations. Optima Tax Relief is the nation’s leading tax resolution firm.
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