Is The Sales Tax Deduction Right For You?

As the year winds down, many people begin to wonder whether they should put off until next year purchases they were considering for this year.  One interesting wrinkle to consider from a tax perspective is the sales tax deduction.

 

MAKING THE CHOICE

This tax break allows taxpayers to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes.  It was permanently extended by the Protecting Americans from Tax Hikes Act of 2015.   The deduction is obviously valuable to those who reside in states with no or low income tax.  But it can also substantially benefit taxpayers in other states who buy a major item, such as a car or boat.

 

CONSIDERING THE BREAK

Because the break is now permanent, there’s no urgency to make a large purchase this year to take advantage of it.  Nonetheless, the tax impact of the deduction is worth considering.

For example, let’s say you buy a new car in 2016, your state and local income tax liability for the year is $3,000, and the sales tax on the car is also $3,000.  This may sound like a wash, but bear in mind that, if you elect to deduct sales tax, you can deduct all of the sales tax you’ve paid during the year – not just the tax on the car purchase.

 

PICKING AN APPROACH

To claim the deduction, you need not keep receipts and track all of the sales tax you’ve paid this year.  You can simply use an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale, plus the tax you actually pay on certain major purchases.  Then again, if you retain documentation for your purchases, you might enjoy a larger deduction.  The “actual receipt” approach could result in a sizable deduction if you’ve made a number of notable purchases in the past year that don’t qualify to be added on to the sales tax calculator amount.  Examples include furnishing a new home, investing in high value electronics or software, or purchasing expansive jewelry (such as engagement and wedding rings).

 

SAVING WHILE BUYING

The sales tax deduction offers an opportunity to save tax dollars while buying the items you want or need. Let us help you determine whether it’s right for you.