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George Saenz, the Bankrate.com Tax Talk columnistDeducting home remodeling sales tax costs

Dear Tax Talk,
I purchased a home in February 2006 and hired a contractor to remodel several rooms. I purchased new appliances, granite countertops, sinks, faucets, light fixtures, etc., which were installed by the contractor. Are these items considered "building materials" that I can get a sales tax deduction for in the state of Texas? Thanks.
-- Heather

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Dear Heather,
The sales tax deduction is alive and well for 2006 thanks to Congress, even though it is not included as a deduction line on Schedule A if you read the fine print. Fine print means navigating through many IRS screens. According to Schedule A instructions, Congress was considering law changes when the forms and instructions went to print. So they suggest you go to www.irs.gov and then click on More Forms and Publication and then click on What's Hot in Forms and Publications and then click on Individuals. Then put on your eyeglasses and look for "State and Local General Sales Tax Deduction" while scrolling down.

There was some confusion from prior law as to when you can claim sales tax on major home improvements. Publication 600 provides the following guidance:

Sales tax can be deducted on a home, including a mobile home or prefabricated home, or substantial addition to or major renovation of a home, but only if the tax rate was the same as the general sales tax rate and any of the following applies.

Sales tax can be deducted if the following apply:
a. Your state or locality imposes a general sales tax directly on the sale of a home or on the cost of a substantial addition or major renovation.
b. You purchased the materials to build a home or substantial addition or to perform a major renovation and paid the sales tax directly.
c. Under your state law, your contractor is considered your agent in the construction of the home or substantial addition or the performance of a major renovation. The contract must state that the contractor is authorized to act in your name and must follow your directions on construction decisions. In this case, you will be considered to have purchased any items subject to a sales tax and to have paid the sales tax directly.

It sounds like you fall into category "b"' preceding, but you may want to check into what sales tax your contractor is billing you for, such as on drywall, cement, etc., to see if it may be possible to claim the expense under category "c" as well.

To deduct your actual expenses for specified items such as home improvements, vehicles, boats and planes (plus the table amount for general purchases), enter the amount on Schedule A, line 5, and enter the letters "ST" on the dotted line to the left of the line 5 entry space.

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: March 6, 2007
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