Itemizing Sales Taxes vs Standard Income Tax, Which Deduction Is Best For You?

Sat Apr 09, 2016 21:14:01PM
Patrons shopping at a Target Superstore.

Unless you live in Delaware, Montana, Oregon, or New Hampshire, you are well aware of exactly what your state (and/or local) sales tax is. Makes sense; you've had to pay it on almost every single item you've ever purchased from a retailer.

With the minor exceptions of non-perishables at the grocery store, gas at the pump, or buying items online, if you purchase a product in your state, an additional tax (anywhere from 1.78% - 9.46% of the sale price) gets tacked on and goes to the state and/or local government. The proof (an exact % and amount) is printed on every receipt you get at the end of any purchase.

Fair enough. But were you also aware that you can actually write off all that sales and local tax spent, come tax time? This guide will help you determine if you qualify to itemize your sales tax paid throughout the year, the options available to do so, and if it makes sense for you to do in the first place.

First off, do you qualify?

Well, as outlined above, if you live in Delaware, Montana, Oregon, or New Hampshire, your income tax deduction will always be higher, so you shouldn't itemize. But if you live in any of the other 46 states in the union, it all depends on which number is higher.

Basically you have 2 choices:

1) Take the Federal Standard Income Tax Deduction
2) Itemize your sales and local taxes instead.

But you can't do both.

Maximum benefit will come from folks living in states where they don't charge a state income tax, being -- Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming. Since you don't pay state income tax if you live there, it's in your best interest to itemize sales tax deductions instead. (or at the very least calculate and determine wish is really best, for sure)

Also, if you live in a state that has really high combined local and state sales tax %s, like Tennessee, Arkansas, Louisiana, or Alabama (four of the highest), then you should use the calculator below to see if your sales tax paid is higher than your standard deduction. If you purchase much throughout the year, likely it will be.

And finally, even if you don't live in a state without income tax, or a state that has really high sales tax, if you have made big money purchases throughout the year (like a home, motor vehicle, aircraft, boat, or even leased a vehicle) it's worth taking the 5-10 minutes to see if your sales tax eclipses your standard deduction as well.

Basically, a good majority of people should take the extra 5-10 minutes with the IRS calculator tool, just to see. There's a solid chance you will save more on your taxes this way.

Calculate and decide once and for all..

If you think you qualify, or just want to use the nifty IRS calculator, just to see, there are 2 options for going about that --->>>

1) Add up all the sales tax paid throughout the entire year, from every single receipt you have, and then claim that ONLY IF it's a larger number than your standard deduction, using this Itemized Deductions Worksheet.

Keep in mind big time purchases count, and you might want to consult with a tax consultant just to find out if it's legitimate to itemize XYZ purchase or not, so here's a good guide from Taxslayer for that, to get you started.

If you haven't been judicious about saving all receipts throughout the entire year though (most aren't) use this option:

2) The IRS Sales Tax Calculator.

Takes about 5-10 minutes to complete. And you will need your tax information in front of you to get the most accurate answer. But this will give you a total sales and local tax itemize deduction amount. Once you get this number, compare it to your standard deduction. Then just deduct the larger amount.

So you qualify, and you've determined your sales tax deduction > your standard income tax deduction. Now what?

When it comes time to file your taxes, you will just need to fill out Form 1040, Schedule A. This form will also briefly go over everything mentioned above, and more.

Of course if you are self employed, there are many other itemized deductions you can take advantage of, alongside itemizing combined state and local income taxes paid for the year.

Hope this helps. Many that have taken advantage of this little known ability have found themselves owing less, or getting a bigger refund back come tax time. There's a good chance you could be one of them.

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