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 IRS provides a bit of a silver lining — a federal sales tax deduction. Sales taxes you pay during the course of the year qualify subject to certain rules.
You Have to Itemize Your Deductions
One of those rules is that sales taxes are an itemized deduction on the federal Form 1040. You must claim them on Schedule A when you prepare your tax return, and this isn't always advantageous for everyone. Many taxpayers find that the standard deduction is greater than the total of all their itemized deductions, making claiming it a better deal because it reduces taxable income more.
Itemizing or claiming the standard deduction is an either/or option. You can't do both, but you can elect the option that results in the most tax savings for you.
Sales Taxes vs. Other State and Local Taxes
Now you have another choice to make. You can deduct state and local income and property 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 this 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 enjoy healthy earnings, 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
The Tax Cuts and Jobs Act (TCJA) limited this tax deduction, often referred to as the SALT deduction for "state and local taxes," when tax reform became effective in January 2018. 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 file a separate return.
The TCJA only remains in effect through 2025 unless Congress acts to renew some or all of its provisions, so it's possible this limit can be eliminated or increased in future years.
Actual Sales Tax Expenses
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 Sales Tax Calculator tool each tax year.
The actual sales tax method is easy, at least on the surface. Just keep all your receipts all year and add them up. Your deduction is the total amount of all the sales taxes you paid. This method requires a lot of 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 if you have the discipline to enter the sales tax from each receipt on a regular basis and keep a running tally. Otherwise, you'll be faced with a mountain of receipts at tax time, faced with the odious challenge of adding them all 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.
Another Option: 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 tables are broken down by your state, your income, and the number of exemptions you claim. The numbers are an estimation by the IRS as to how much you probably spent on sales tax for everyday items based on these factors.
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.
Still, they're just an estimation.
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. But start adding up those receipts if you think you spent more because you'll 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.
Check with a tax professional if you're unsure.
Record-Keeping for the Sales Tax Deduction
Be sure to keep receipts showing the sales tax you paid for big-ticket items like cars and home improvements, just in case the IRS raises an eyebrow at how much you're claiming. And, of course, you'll have to keep all receipts for all purchases you made that incurred sales taxes if you're using the actual expense method,
A Special Rule for Married Couples 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. And 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.
And remember, you're limited to a $5,000 ceiling if you file a separate return.
Tax laws change periodically and the above information might not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.
Internal Revenue Service. "Sales Tax Deduction Calculator," Accessed Dec. 4, 2019.
Internal Revenue Service. "With the New SALT Limit, IRS Explains Tax Treatment of State and Local Tax Refunds," Accessed Dec. 4, 2019.