The Federal Sales Tax Deduction
You'll have some choices to make if you want to claim this deduction
Paying a sales tax can sting, particularly when you're purchasing a big-ticket item like an automobile or furniture, but the Internal Revenue Service (IRS) provides a bit of a silver lining—a federal sales tax deduction. Sales taxes you pay during the course of the year qualify for the deduction, but there are some rules and details that complicate the claims.
Here's what you need to know if you're considering writing off your sales tax costs on your federal tax returns.
You Have to Itemize Your Deductions
When you're filing taxes, you can either claim the standard deduction or itemize your deductions—you can't do both. If you want to claim sales taxes, you'll have to itemize them on Schedule A of the federal Form 1040.
This isn't always advantageous for everyone. Many taxpayers find that the standard deduction is greater than the total of all their itemized deductions. For those taxpayers, claiming the standard deduction is a better deal because it further reduces taxable income.
In the 2020 tax year, the standard deduction is worth $12,400 for single filers and $24,800 for married couples filing jointly (this increases to $12,550 and $25,100, respectively, in the 2021 tax year). If your total itemized deductions don't surpass these thresholds, you'll save more money by taking the standard deduction.
You Can't Claim State and Local Income Taxes
In addition to choosing between the standard deduction and itemized deductions, you have another choice to make: you can deduct state and local income taxes, or you can deduct sales taxes that you paid during the year, but you can't claim both.
The sales tax deduction works best for people who live in states with no income tax (so the income tax deduction isn't available to them), or those whose sales tax deduction is larger than their state income tax deduction would be. If your state has a significant income tax rate and you have a steady income from a well-paying job, you'd have to tally up a lot of sales taxes during the year to make claiming this deduction worth your while.
The Effect of the Tax Cuts and Jobs Act
When the Tax Cuts and Jobs Act (TCJA) became effective in 2018, it limited state and local tax (SALT) deductions. You're now limited to no more than a $10,000 deduction, regardless of whether you claim income taxes or sales taxes. This drops to just $5,000 if you're married but filing a separate return.
Many aspects of the TCJA are scheduled to sunset in 2025, including the SALT deduction limit. Unless Congress acts to renew some or all of the provisions set to expire, it's possible this limit will be eliminated in future years.
The 2 Options for Calculating Sales Tax
You have two options for calculating your sales tax deduction, should you decide to take it. You can use your actual sales tax expenses, or you can use the optional sales tax tables that are available through the IRS.
Actual Sales Tax Expenses
The actual sales tax method is easy, at least in theory. Simply keep all your receipts throughout the year and add them up at tax time. Your deduction is the total amount of all the sales taxes you paid. The downside to this method is that it requires a lot of meticulous record-keeping, but it can result in a higher deduction.
You can make it easier on yourself by saving your receipts and maintaining a spreadsheet. Be disciplined about entering the sales tax from each receipt regularly to keep a running tally that's easy to reference at tax time. Otherwise, you'll be faced with a mountain of receipts at tax time that all need adding up.
Consider a personal finance app for your smartphone to keep track of what you spend—many allow you to snap pictures of your receipts and will keep track of them for you as you spend and collect them.
Using The IRS Sales Tax Tables
The Internal Revenue Service provides a Sales Tax Calculator for small, everyday expenditures, then you can add on sales taxes you paid on big purchases such as vehicles, boats, aircraft, or home additions. The IRS even offers a worksheet in its instructions for Schedule A to help you keep track of these figures.
The IRS may want to verify large purchases, so it's important to keep the receipts for your biggest purchases, even if you use the sales tax tables.
The IRS tables are broken down by your state, your income, and the number of exemptions you claim. These tables are just estimates, but they do take many crucial factors into account. Some states have higher sales tax rates than others, and the tax tables take this into consideration. People with more income at their disposal tend to spend more, and the tax tables take this into account, as well.
If you actually spent less than this number the IRS assigns to you, you're better off using the tables—and you're allowed to do that. However, if you think you might have spent more than the IRS estimate, start adding up those receipts to get a better deduction.
Tax Planning Using the Sales Tax Deduction
Some people who claim the state and local income tax deduction must report their state income tax refunds as taxable income on their returns in the following year. This isn't the case if you claim the sales tax deduction, so if your sales tax deduction is about the same as your income tax deduction, you might come out ahead over the long term by taking the sales tax deduction.
It's best to check with a tax professional if you're unsure about whether to claim income or sales taxes.
A Special Rule for Married Couples Filing Separately
In addition to the lower $5,000 deduction ceiling, there are a few more special rules for those who are married but filing separately. You and your spouse must both itemize or you must both take the standard deduction if you file your federal taxes using the married filing separately status. Both of you must take either the state income tax deduction or the sales tax deduction if you're itemizing. The tax laws don't allow for mixing-and-matching of these deductions.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.