If you live in a state with no income tax but one that does levy sales taxes and you made some major purchases throughout the year, such as a new car, taking a deduction for state and local sales taxes could benefit you.
Taxpayers can deduct state income taxes or state and local sales taxes, but not both. Most people pay more in state income taxes than in state and local taxes, which is why residents of states with no income tax usually benefit more from the state and local tax, or SALT, deduction.
However, taxpayers who were anticipating unlimited SALT deductions, including sales taxes, could be disappointed this tax season.
That’s because the overhaul of the tax code passed by Congress in December 2017 caps the deduction for all state and local taxes, including sales taxes, to $10,000. It was previously an unlimited deduction whose benefits overwhelmingly went to high-income, high-tax states, such as California and New York.
For example, a single filer who owed $5,000 in state income taxes and $7,000 in local property taxes could have deducted the entire $12,000 in 2017, but for 2018, he is capped at $10,000.
Married couples stand to take a bigger hit than single filers on sales-tax deductions because whether they file jointly or separately, they cannot claim more than $10,000 total in SALT deductions on their 2018 returns.
In addition, the ceiling on the SALT deduction is lower than the new standard deductions. The new tax law nearly doubled the standard deductions for 2018 to:
- $12,000 for individuals.
- $18,000 for head of household.
- $24,000 for married, filing jointly.
“A rise in the standard deduction will cause many taxpayers to rethink whether they should continue to itemize deductions,” notes Bob D. Scharin, senior tax analyst at Thomson Reuters Tax & Accounting in Hoboken, New Jersey. “The result will be an increase in the number of taxpayers who, instead, claim the standard deduction.”
Taking the standard deduction will simplify your taxes because there are no worksheets or extra forms to fill out, but you will not be able to itemize other expenses, including state and local sales taxes, home mortgage interest, charitable donations and medical and dental expenses.
Scharin says many homeowners with mortgages are expected to keep itemizing.
“Mortgage-paying homeowners remain a group of taxpayers who are more likely than others to continue to itemize deductions,” he says, “as their mortgage interest and (to the extent permitted by the state and local tax deduction cap) real estate taxes put them on the course to having significant deductions to itemize.”
If your itemized deductions reduce your taxable income more than the standard deduction, it pays to itemize.
People typically pay more in state income taxes than they do in state and local sales taxes. But double-check your totals.
Regardless of your state’s tax laws, to take full advantage of the sales-tax deduction, you have to know exactly how to file for it and which taxes you can claim.
Choosing your tax deduction method
Deciding whether to itemize deductions or claim the standard deduction is an important choice at tax time. If sales taxes are your only deductible expense, it’s not worth it to itemize because the standard deduction is higher. You always want to take the largest deduction you’re allowed.
Taxpayers who itemize expenses will have to determine which deduction — sales taxes or income taxes — will give them the bigger break.
Writing off the right amount
Then there’s the issue of how much in sales taxes you can claim. Totaling your receipts might be worthwhile if you made a lot of big purchases in 2018. Maybe you furnished a new home, paid for a wedding or bought a lot of expensive electronic equipment.
“Basically, you’re looking for spending that’s disproportionate to your income,” says Scharin.
Most filers, however, will claim the amount that the IRS has figured for them in special sales tax tables for each state. The IRS tables with standard sales tax deduction amounts can be found in the Schedule A instructions.
Counting all your income
Even with the tables, it’s not quite that simple. You need to keep a couple of things in mind to get the biggest deduction.
First, the figure you enter on your Form 1040 is taxable income, but the sales tax table amounts are based on total income, not just your adjusted, taxable income.
Among the other types of income are tax-exempt interest, veterans’ benefits, nontaxable combat pay, the nontaxable portion of Social Security and other retirement benefits, and the nontaxable parts of IRA, pension or annuity distributions.
Also, most of the tables cover only the state rates. “If you have a local sales tax, which many people don’t realize, you could be sacrificing some of the deduction if you use only the table amount,” says Scharin.
If you’re not using tax software, a worksheet in the Schedule A instructions will help you determine the correct number for local sales taxes.
You also may have to do extra math if you lived in different states that collected sales taxes. In this case, you must determine each state’s sales tax amount to arrive at your correct deduction.
While all these considerations create more work for some taxpayers, Scharin says, “If you went this far and you’re itemizing, you might as well get your full deduction.”
The IRS also offers an online sales tax deduction calculator.