The state and local sales taxes you pay can quickly add up whether you make major purchases like cars and computers or you spend thousands on smaller items throughout the year. The exception is if you live in one of the few states that don't charge this kind of tax.
The Internal Revenue Service provides a sales tax deduction that will give you some tax savings for what you paid, but there are limits and requirements you must meet to be able to claim this cost on your federal tax return.
Exploring the Sales Tax Deduction
Some locations like Alabama, Louisiana, Tennessee, Washington and Arkansas had combined state and local sales tax rates of more than 9 percent as of 2021. You could end up paying thousands of dollars in sales tax throughout the year if you make purchases in these locations. But the IRS makes the sales taxes you paid tax deductible. You can add up the amount incurred and subtract it from your income so only the balance is subject to federal income taxes after you take all other deductions you qualify for.
This sales tax break isn't a tax credit that directly cuts the taxes you owe for the year. But the sales tax deduction could reduce your taxable income to $45,000 if you incurred $5,000 in sales tax for a vehicle purchase and had an adjusted gross income of $50,000.
But the IRS has set some specific rules for this deduction. First, it's only available if you itemize your deductions. This means forgoing the standard deduction for your filing status. You can't claim both.
Second, the IRS won't let you deduct local and state income taxes you paid if you choose to deduct local and state sales taxes in that tax year. This is another either/or decision.
Finally, the IRS sets a limit of or $10,000 for all your state and local taxes (income or sales) plus property taxes. This drops to $5,000 if you're married and file a separate return. You might pay $15,000, but you can only claim a tax deduction for $10,000 of that.
These rules mean that you might actually get a lesser deduction by itemizing and claiming sales taxes than you would by claiming the standard deduction instead
The Requirement to Itemize
It helps to know whether itemizing is actually financially beneficial for your situation before you commit to deducting those sales taxes. It would be less than the standard deduction for the average taxpayer even if you qualified to deduct $10,000 in sales tax for the 2021 tax year, the year for which you'll be filing a return in 2022. The standard deductions for 2021 are $12,550 if you're single or you're married and filing a separate return, $25,100 if you're married and file a joint return, and $18,800 if you qualify as head of household.
Most people can claim the standard deduction unless they're not a permanent resident, their spouse files a separate return and itemizes, or their tax year covers an irregular period.
But itemizing can be more beneficial if you have other deductions you can claim besides the sales tax you paid. The IRS offers numerous other itemized deductions for expenses like medical expenses, charity contributions and interest expenses. IRS form Schedule A gives you an idea of the types of itemized deductions that are available, along with tips on calculations and requirements. You can benefit from calculating and reporting the information if it seems that your sales tax deduction and other itemized deductions surpass the amount of your standard deduction.
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.
You can go with the manual method if you want to deduct the exact amount paid and you saved receipts and invoices for purchases made throughout the year. You must go through each document, locate 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. Tax software may help you with this, however.
The IRS has created a worksheet you can fill out in the Schedule A instructions and an online calculator if you don't mind using an estimated amount based on IRS data. Both tools use the same methodology to calculate the sales tax based on your adjusted gross income, reported purchases and where you lived and your length of residency. The calculator helps avoid math errors since it does the work for you. 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 you paid for major purchases like homes and vehicles.
Using the IRS Tax Calculator
You don't have to use a sales tax table when you use the IRS sales tax deduction calculator. 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, if applicable) 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.
- Choose the income range that fits your situation using your W-2 form. 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.
- Enter 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 at any time during the year. If so, you'll have to go through a few extra pages where you mention how many times you moved and enter the zip code and the city name. 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 as well as links to delete certain moves, add a move or start over, if necessary.
- A table shows state and local sales tax per residency and a total amount near the bottom that you can enter on your Schedule A.
Read More: Math Equation to Calculate Sales Tax
Deducting Your Sales Taxes
You're ready to report the information on your 1040 tax return. when you have your sales tax deduction amount in hand. Start by filling out your Schedule A where you'll report not only sales tax but also any other itemized deductions that you're eligible to claim.
The second section on Schedule A is dedicated to "Taxes You Paid." Line 5a is where you'll enter the sales tax deduction amount. You can also report any property taxes you paid on line 5c. The total of all taxes you paid appears on line 7. The totals from all sections are added together and this total amount of itemized deductions appears on line 17.
Compare this number to your standard deduction to make sure it's more. Then you can move forward with entering the amount for either your itemized deductions or your standard deduction on line 12a of your Form 1040 tax return.
- IRS: Sales Tax Deduction Calculator - Frequently Asked Questions
- IRS: Topic No. 501 Should I Itemize?
- IRS: Schedule A
- IRS: Tips and Guidance for Determining Sales Tax Deduction
- IRS: 2021 Instructions for Schedule A
- IRS: Form 1040
- Tax Foundation: State and Local Sales Tax Rates 2021
- IRS: Topic No. 503 Deductible Taxes
- IRS: IRS Provides Tax Inflation Adjustments for Tax Year 2021
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.