A Choice for Taxpayers: The State and Local Tax Deduction

Your Guide to State, Local, Federal, Estate + International Taxation

Now that you finally have the time, you decide to review the tax return you recently filed. In doing so, you know that you supplied the preparer with the amount of sales tax that you paid on the new car sitting in your driveway, but to your dismay it looks like there has been an error. There is nothing on your return that that is designated as sales tax at all! Before you pick up the phone or write the e-mail, you should take a look at line 5 in your itemized deductions. Chances are, if you live in a state where there is a state income tax, your deduction was based on these rather than the state sales tax.

State and local taxes have been allowed as a deduction since the inception of the federal income tax system in 1913. For tax years 2014 and prior, taxpayers were allowed to take an itemized deduction for either the state and local income taxes or the state and local general sales taxes they paid. It is an either or situation. The deduction for state and local general sales taxes has faced numerous provisions that would eliminate the deduction; however, it has been saved in the last minute congressional dealings numerous times. Under current law, the deduction for state and local sales tax expired at the end of 2014. While nothing is ever a given, it would seem likely that there would again be an extension of this deduction given heavily populated states such as Texas do not have a state income tax.

So, how will you know if you would get a bigger deduction if you elected to use the sales tax deduction? You can base your sales tax deduction on the actual amount of sales tax paid during the tax year. This requires that you retain receipts that show the amount of general sales taxes paid. If you are like me, that could be a lot of paper by the end of the year. There must be an easier way, and there is. The IRS has created tables that can be used to determine the amount of state and local sales tax deduction available to you. The tables are built on the average consumption of taxpayers on a state-by-state basis, taking into account your filing status, adjusted gross income, number of dependents and state and local sales tax rates. There is a great tool on the IRS website that can be used to compute the state and local general sales tax deduction. The “Sales Tax Deduction Calculator” can be accessed on the IRS website-IRS.gov by entering sales tax deduction calculator in the search box. In addition to the amount calculated from the tables, taxpayers are allowed to add the sales tax paid on motor vehicle purchases and boats. Additionally, the IRS allows the tax paid on aircraft and homes, home building materials and substantial additions to or major renovations to the home. There are additional requirements related to the sales tax on expenditures related to homes, so be sure to check with your tax professional to verify the sales tax you paid qualifies. Foreign sales tax you pay is not deductible.

Your decision as to which type of tax to deduct is not binding on you. One year you may choose to deduct the state and local income tax and in the next year the state and local sales tax. The deduction for state and local taxes is a preference item in the calculation of the alternative minimum tax. If you are subject to this tax, you will find that the benefit of your deduction is reduced or, in some cases, eliminated in its entirety.

As the deduction for the state and local sales taxes has expired, this may be a moot point. The fate of the state and local sales tax deduction for tax years after 2014 will likely not be known until the end of 2015. If the deduction rises like the phoenix from the ashes, this however, may well be an area for you to look at when preparing your individual income tax return next year and is most certainly a choice you have for your 2014 return. Who doesn’t like choices?

By Cheryl Dickerson, CPA