Never underestimate the staying power of a popular tax break. A deduction that was excised from the tax code by 1986's landmark tax legislation was "termorarily" reinstated five years ago. It's still on the books.The resurrected law, which has been continued through the 2009 tax year, allows taxpayers to deduct state and local sales tax they pay in lieu of state income taxes.
The deduction is particularly welcomed by taxpayers in the seven states that do not collect state income taxes but do levy state sales taxes: Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. It also could benefit some Alaskans who, although they pay no state income or sales taxes, do face local sales taxes.
Even some residents of states with both types of taxes might find the sales-tax deduction is more valuable to them than the income tax write-off. For those keeping tax-collection score, New Hampshire has neither a sales nor an income tax, but Granite State officials do collect taxes on dividend and interest income.
But regardless of your state's tax collection practices, to take full advantage of the sales tax deduction you have to know exactly how to file for it and just which taxes you can claim.
Choosing your deduction method The process begins with your answers to two filing questions. First, do you plan to itemize? If so, then which write-off -- sales taxes or income taxes -- will give you the biggest break?
Deciding whether to itemize deductions or claim the standard amount is always a key tax-time choice. The Internal Revenue Service says that most people take the standard deduction. It's easy to claim; there are no forms or work sheets to fill out and the amount is printed right there on your return near the line where it should be entered.
Plus, each year the standard deduction increases, thanks to inflation adjustments. For 2008 filing purposes, the standard deduction is $5,450 for single filers or married couples filing separately, $8,000 for head of household filers and $10,900 for married couples who file a joint return.
But if you use the standard deduction, you can't take the sales tax break. To claim the sales taxes you paid, you must itemize.
If you have deductions such as mortgage interest, property taxes, charitable donations, and medical and miscellaneous expenses to add to your sales taxes, then the new deduction should help you push your Schedule A total well above your standard deduction amount.
However, if sales taxes are your only deductible expense, then it's not worth it to itemize. This one itemized deduction will likely be much less than your standard deduction, and you always want to take the largest tax deduction amount you're allowed.