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George Saenz, the Bankrate.com Tax Talk columnist Figuring the sales tax deduction

Dear Tax Talk,
I'm planning to take the sales tax deduction instead of the state income tax deduction when I file this year for tax year 2006 -- since I live in Texas, where there's no state income tax. I used the calculator on the IRS Web site and included several big-ticket items that I purchased during 2006, including two cars. It spits out a number that is somewhat attractive.

My question is this: I have been getting year-end summaries from several of my credit cards and they seem to suggest that the year-end summaries are useful for tax purposes. I can only assume that they mean I can use them to deduct even more purchases from my 2006 taxes, such as monthly grocery purchases, etc. I'm not sure if I need the actual receipts or if I can indeed use these year-end credit card summaries to claim a sales tax refund on these smaller purchases.
-- Matthew

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Dear Matthew,
According to the IRS introductory material to the online sales tax deduction calculator:

If you file a Form 1040 and itemize deductions on Schedule A, you have the option of claiming either state and local income taxes or state and local sales taxes, but you can't claim both. If you saved your receipts throughout the year, you can add up the total amount of sales taxes you actually paid and claim that amount. If you didn't save all your receipts, you can still choose to claim state and local sales taxes, using the calculator.

The IRS doesn't say that a year-end credit card summary is equivalent to saving all your receipts but, in my opinion, I can't see that it is not convincing evidence of the amount of sales tax you paid.

The problem with the IRS tax calculator is that it is based on adjusted gross income -- with minor modifications for nontaxable income -- and does not take into account spending from savings. Suppose I have $1 million earning 4 percent, my AGI is only $40,000. If I live in Miami, the sales tax deduction calculator yields a deduction of $691 for a family of two. Since the tax rate is 7 percent in Miami, this is equivalent to about $10,000 in taxable spending for the year, or about $800 a month. Dinner for two in Miami can run you $200. If you look at your credit card statement and you exceed the $10,000 that the IRS is considering, you have something to contemplate.

Although the calculator allows you to add taxes on big-ticket items, it ignores a few that the IRS has not deemed fit to include. Big-ticket items include motor vehicles, boats and planes and some major home renovations. It doesn't take into account jewelry, furs, appliances, plasma TVs and computers. All these can certainly add up to more than the $10,000 for the millionaire family.

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "taxes" as the topic.

Bankrate.com's corrections policy-- Posted: Feb. 13, 2007
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