Whether you make major purchases like cars and computers or spend thousands on smaller items throughout the year, the state and local sales taxes you pay can quickly add up. The exception is if you live in one of the few states that don't charge this kind of tax. The Internal Revenue Service makes the sales tax deduction available to help you get tax savings for what you paid, but there are limits and requirements to be aware of before you opt for it on your tax return.
Learn how the sales tax deduction works, when it makes sense to take it and what you need to complete on your tax forms to get this benefit.
Exploring the Sales Tax Deduction
With some locations like Tennessee, Washington and Arkansas having combined state and local sales tax rates upwards of 9 percent, you can end up with thousands of dollars in sales tax throughout the year. The IRS makes sales tax paid deductible so you can figure the amount incurred and subtract it from your income that's subject to federal income taxes.
Note that this isn't a tax credit that directly cuts the taxes due for the year. Rather, if you incurred $5,000 in sales tax for a vehicle purchase and had an adjusted gross income of $50,000, the sales tax deduction could reduce your taxable income to $45,000.
The IRS has set some specific rules for this deduction that you need to follow. First, it's only available if you claim itemized deductions and forgo your standard deduction. Second, the IRS won't let you deduct any local and state income tax amounts if you choose to deduct local and state sales taxes that year. Lastly, the agency sets a limit of either $5,000 (for those filing as married filing separately) or $10,000 (for those filing with all other statuses) for all state and local taxes along with property taxes combined.
These rules mean you might actually get a lower deduction itemizing and claiming sales taxes than you would by just accepting your standard deduction. Therefore, you need to closely examine the sales tax paid to decide if it's worth going through the deduction process.
Considering the Requirement to Itemize
Before moving forward with the sales tax deduction, it helps to know whether itemizing is actually financially beneficial for your situation. Even if you qualified to deduct $10,000 in sales tax for the year, that would be less than the standard deduction for a typical taxpayer. That amount could range from $12,400 if you're a single taxpayer to $24,800 if you're filing jointly with your spouse. Most people can go this easier route unless they're not a permanent resident, their spouse files a separate return itemizing, or their tax year covers an irregular period.
It can make itemizing more beneficial if you have other deductions besides your sales tax. For example, the IRS has other itemized deductions you can claim for things like large medical expenses, charity contributions and interest expense. Take a look at the IRS form called Schedule A, which gives you an idea of the types of itemized deductions available along with tips on calculations and requirements.
If it seems your sales tax deduction and other deductions surpass your standard deduction, then you can benefit from calculating and reporting this information.
Read More: How Much Is the Standard Tax Deduction?
Options for Determining Your Deduction
The IRS gives you a couple of options for determining the sales tax you can deduct. Which one you select depends on your recordkeeping, the amount of work you're willing to do and your comfort with an exact versus estimated deduction amount.
If you saved receipts and invoices for purchases throughout the year, you can go with the manual method if you want to deduct the exact amount paid. This means you need to go through each document, locate the the sales tax paid and get a final sum to report on your Schedule A. This might not be too hard if you only need to deduct for a couple of major purchases, but it becomes tedious for dozens of everyday purchases. However, tax software may help you with this.
If you don't mind an estimated amount based on IRS data, the agency has created both a worksheet you can fill out in the Schedule A instructions and an online calculator. Both tools use the same methodology to calculate the sales tax based on your adjusted gross income, reported purchases and where you lived and length of residency, but the calculator helps avoid math errors since it does the work for you. Therefore, the IRS suggests choosing this option, as it takes 10 minutes or less for most taxpayers, and you can still report the exact sales tax paid for major purchases like homes and vehicles.
Using the IRS Tax Calculator
When you use the IRS sales tax deduction calculator, you don't need to use a sales tax table. And, it walks you through several steps you need to complete within 20 minutes. Otherwise, the tool times out and you have to start over. The IRS recommends gathering receipts for major purchases (such as cars and homes), having your W-2 form available and knowing your residencies (including moving dates) for the year before you begin.
Once you're ready, you can follow these steps to work through the calculator:
- Select the tax year you're working on.
- Using your W-2 form, choose the income range that fits your situation. Next, choose the size of your family. Lastly, the IRS asks you to enter the amount of sales tax you paid for a motor vehicle, boat, home or aircraft.
- Type the zip code where you lived at the beginning of the tax year. Continue by selecting the corresponding city name that comes up from your starting zip code.
- Specify whether you moved any time during the year. If so, you go through a few extra pages where you mention how many times you moved and enter the zip code, select the city name and report the moving dates for each location.
- Check the confirmation screen that appears with your residency, specified sales tax, income and family size information. There's an edit button beside the various options and also links to delete certain moves, add a move or start over, if necessary.
- There's a table showing state and local sales tax per residency and a total amount near the bottom that you can write on your Schedule A.
Read More: Math Equation to Calculate Sales Tax
Deducting Your Sales Taxes
With your sales tax deduction amount in hand, you're ready to report the information on your 1040 tax return. Start by filling out your Schedule A, where you not only report sales tax but also any other itemized deductions you're claiming.
Enter medical and dental expense information in the first section and continue to the second section dealing with taxes. Line 5a is where you put the sales tax deduction amount, while you can also report property taxes on line 5c.
Continue with the third section to report interest paid such as home mortgage interest and investment interest. Then you can report charity contributions in section four, theft and casualty losses in section five and other itemized deductions (such as gambling losses) in section six.
Add up all the deductions from lines 4 to 16 to get your total amount of itemized deductions on line 17. Compare this number to your standard deduction to see which is the bigger number. At this point, you can move forward with putting the amount for either your itemized deductions or standard deduction on line 9 of your 1040 form.
- IRS: Sales Tax Deduction Calculator - Frequently Asked Questions
- Intuit TurboTax: How to Write Off Sales Taxes
- Tax Foundation: State and Local Sales Tax Rates, Midyear 2020
- IRS: Topic No. 501 Should I Itemize?
- NerdWallet: Standard Tax Deduction: How Much It Is in 2020 and When to Take It
- IRS: Schedule A
- IRS: Tips and Guidance for Determining Sales Tax Deduction
- IRS: 2019 Instructions for Schedule A
- IRS: Form 1040
- 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.
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.