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Dear Tax Talk,
I just hired a contractor to replace the roof of our house. Would I be able to add the sales tax paid for roof replacement to the amount of optional sales tax and claim a tax deduction? What type of document do I need to send along with the tax return?
The sales tax deduction that was passed temporarily in 2004 and has been extended one to two years at a time is still alive and well for 2009 tax returns.
Special sales tax deductions for new vehicle purchases exist for nonitemizers and those itemizers claiming a deduction for state and local income taxes as discussed in my prior column.
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 an optional sales tax calculator provided by the IRS on its Web site, to which you can add major purchases or your actual receipts (which presumably include major purchases). Major purchases include amounts paid for sales tax on renovations to your home.
When it comes to major home renovations, the sales tax deduction can get confusing. If your roofing contractor charged you sales tax on the entire contract amount then you can claim the sales tax paid to the contractor.
Suppose your contract price was $20,000 and your state sales tax was 6 percent and the contractor charged you $1,200 on top of the contract amount. The entire $1,200 is deductible.
Suppose instead that you buy all the material and pay the sales tax directly to the materials provider. The amount paid is similarly deductible, including any sales tax on the contractor’s services. Suppose instead that the contractor buys all the material and charges you a fixed contract price, which under your state tax laws is exempt as an improvement to real estate. In this case the contractor paid the sales tax and not you, and accordingly you have no deduction.
Because a major renovation can cost big money and sales tax, you want to structure the purchase of the materials properly to maximize your sales tax deduction. At the same time, you don’t want to anger the contractor so that he doesn’t show up.
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.
Read more Tax Talk columns. To ask a question on Tax Talk, go to the “Ask the Experts” page, and select “Taxes” as the topic.