One of the itemized deductions you can claim on Schedule A of Form 1040 when you file your federal income tax return is for state and local income taxes. But you have the option of claiming a deduction for state and local sales taxes instead of income taxes.
Who Can Claim the Deduction
Any taxpayer who itemizes deductions and who is subject to a state and/or local sales tax has the option of claiming a deduction for the sales tax. This deduction is claimed instead of the deduction for state and local income taxes. You cannot claim both deductions.
How is the Amount of the Deduction Calculated
You can save the receipts for all your purchases during the year and add up the sales tax on those purchases, or you can use the tables provided by the Internal Revenue Service (IRS).
You can claim a deduction for sales taxes actually paid during the year if the tax rate was the same as the general sales tax rate. Sales taxes on food, clothing, medical supplies, and motor vehicles are deductible even if they are charged at a rate that is lower than the general sales tax rate.
When the sales tax rate on motor vehicles is higher than the general sales tax rate, you can claim a deduction for the amount of tax you would have paid at the general sales tax rate. Motor vehicles include automobiles, motorcycles, mobile homes, recreational vehicles, sport utility vehicles, trucks, vans, and off-road vehicles. You can also claim a deduction for the sales and use tax on leased vehicles.
If you choose the option of claiming the deduction based on sales tax actually paid during the year, you will have to keep all your receipts to support the deduction.
Using the Optional Table
Instead of claiming a deduction based on actual sales tax paid, you can use the optional tables to determine your deduction. These tables are found in the instructions for Schedule A of Form 1040.
There is a worksheet in the instructions for Schedule A that you can use for calculating your deduction. This worksheet starts with the sales tax by state and then takes into account the sales taxes in certain localities in the U.S. At the end there is a line for adding the tax you can deduct in addition to the amount that appears in the table, for the purchase of certain items during the year, such as a vehicle or a home.
In the table at the end of the instructions for Schedule A you look up the amount you can deduct based on your income level and the number of exemptions you are claiming on your return.
If you live in a local jurisdiction that charges an additional sales tax, you can refer to the table in the instructions for Schedule A that indicates “Which Optional Local Sales Tax Table Should I Use?” This table refers in turn to the tables that follow, which are indicated as A, B, C and D, based on your locality. Here again you look up the amount you can deduct for local sales taxes based on your income level and the number of exemptions you are claiming.
With the amounts from the tables (state and local, if applicable) you complete the worksheet at the beginning to determine the total amount of your deduction for sales taxes.
Income Level for Purposes of Using the Optional Tables
For purposes of the optional state and local sales tax tables, your income is calculated as your adjusted gross income according to your federal income tax return, plus certain nontaxable income, including: exempt interest; veterans’ benefits; nontaxable combat pay; worker’s compensation; the nontaxable portion of social security or railroad retirement benefits; the nontaxable portion of distributions from individual retirement accounts (IRAs), pensions, or annuities, without including rollovers; and public assistance payments.
The effect of adding these nontaxable amounts is to calculate a deduction for sales tax according to your disposable income, which serves to increase your deduction.
Sales Tax in Addition to the Amount from the Table
You can add the sales tax on certain large purchases you made during the year to the amount from the table, for example a motorized vehicle, plane, or boat; or a home, which could be a mobile home, a prefabricated house, or an addition to your home or a major renovation.
In some states or localities there could be an excise tax on motor vehicles, in addition to the general state and local sales tax. In this case, you can claim a deduction for the general sales tax, but not the additional excise tax.
You can take the additional deduction for the sales tax on a home or an addition or renovation if any of the following conditions apply: the state or locality imposes a general sales tax specifically on the purchase of a home or on the cost of a major addition or renovation; you purchase the materials to do the addition or renovation and pay the applicable sales tax on the materials directly; or you contract the work of doing the addition or renovation to a contractor, and according to current law in your state, the contractor is considered to be your agent. In this case, you will be considered to have purchased the materials and paid the sales tax directly.
When You Live in More than One State or Locality during the Year
When you live in more than one state or locality during the year, you have to prorate the amount in the table, based on the number of days you lived in each place.
Prorating the State Sales Tax
In order to calculate the state sales tax, you multiply the amount from the table (based on your income and number of exemptions) by the percentage represented by the number of days you lived in that state divided by the number of days in the year (365). If one of the states in which you lived does not have a sales tax, your deduction for that portion of the year would be zero.
If you lived in different states during the year and none of the localities in which you lived has a sales tax, you add up the prorated amounts of state sales taxes and include the total on line 1 of the worksheet. But if any of the localities has a sales tax, you have to complete a separate worksheet for each state in order to calculate the deduction, taking into account the local sales tax.
Prorating the Local Sales Tax
Likewise, if you lived in more than one locality during the year, you have to prorate the amounts you can deduct for the local sales tax in each locality. If one of the localities does not have a sales tax, your deduction for local sales tax for the portion of the year you lived in that locality would be zero.
If you lived in different localities within the same state, and the sales tax rate in each locality is the same, you can add the prorated amounts from the table for local income taxes and include the total on line 2 of the worksheet.
If the localities have different local sales tax rates, you will need to complete a separate worksheet for purposes of lines 2 through 6 of the worksheet for each locality. The prorated amount of local sales tax would be indicated on line 2 of the separate worksheet for that locality.
Sales Tax Deduction Calculator
Instead of using the worksheet and the sales tax tables in the instructions for Schedule A, you could use the Sales Tax Deduction Calculator on the IRS website at www.irs.gov. Go to the website and enter “Sales tax deduction calculator” in the search box.
Who Can Benefit from the Sales Tax Deduction
First, in order to take advantage of the sales tax deduction, you have to itemize deductions on Schedule A. If the total of your itemized deductions does not exceed the amount of the standard deduction that applies for you according to your filing status, the sales tax deduction will have no effect on your taxes. But this would not be the case for persons who are obligated to itemize deductions.
Taxpayers who live in states that do not have a state income tax, but that have a sales tax, can benefit from the option to claim a deduction for the sales tax, because it entitles them to an additional deduction that they would not otherwise have.
But even in those states that have an income tax and also a sales tax, you should compare the effect on your taxes of taking the state income tax deduction or the state sales tax deduction to see which results in a lower overall tax. And if you make a major purchase during the year, such as a vehicle or home, you should calculate the sales tax deduction to see if it is to your advantage to claim it.