Sales tax deduction alive and well

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Dear Tax Talk,
I plan to use the sales tax deduction calculator for my federal return. For this purpose, the IRS allows one to add certain types of nontaxable income before applying the sales tax rate. Can I add others, such as disability insurance payments made by private plans for which we paid the entire premium?
— Sheila

Dear Sheila,
Always on the brink of expiring, the sales tax deduction is alive and well for 2010 and 2011, thanks to the year-end extension of the Bush-era tax cuts. This is a valuable tax break for residents of the states without an income tax — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Residents of states with low income tax rates may also want to pay attention to this deduction when itemizing tax deductions on Schedule A.

State and local income taxes have long been allowed as an itemized deduction. When itemizing your deductions, you have to consider whether it is more favorable to claim a deduction for your state and local income taxes or sales tax paid. To determine the amount of sales tax paid you can use either:

  • An optional sales tax calculator provided by the Internal Revenue Service on its website to which you can add major purchases.
  • Your actual receipts (including major purchases).

The sales tax calculator deduction is based on your income and family size. Your income is the amount shown on your Form 1040, “Adjusted Gross Income” line, plus any nontaxable items. A short list of nontaxable items is presented on the IRS website but it is not intended to be all-inclusive. Nontaxable disability income is similar in nature to the items listed and should count for purposes of determining your income for the sales tax deduction calculator.

Major purchases are motor vehicles, boats and planes and in certain circumstances, home renovations. If you use actual receipts under option No. 2 above, all purchases count. So if you bought major items such as jewelry, artwork or items for a wedding, include the sales tax on these items.

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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.