You can deduct either your state's sales tax or income tax, but not both, on Schedule A of Internal Revenue Service Form 1040. You can only deduct sales tax if you itemize your deductions. You can base the deduction amount on your actual sales receipts or use an estimation method provided by the IRS.
If you are highly organized and keep track of your sales receipts, you can enter your actual state and local general sales tax expenses onto Schedule A. You can deduct the full sales tax rate even if you paid less than that rate on purchases of food, clothing, medical supplies and motor vehicles. If you paid sales tax in excess of the general rate on the purchase of a vehicle, you can deduct only the amount you would have paid under the general rate. You can deduct the sales tax on leased vehicles as well, but do not include sales taxes stemming from items you use in your trade or business. Reduce the deduction by any sales tax refunds you received for the tax year.
Estimating Your Sales Tax
If you don't enter your actual sales taxes paid, you can use the IRS paper-based worksheet to help you estimate your deductible sales tax. However, the easier method is to use the online IRS Sales Tax Deduction Calculator. The five-section program asks you a series of questions to determine the sales tax deduction that you then enter onto Schedule A. The calculator instructions advise you to keep handy your W-2 form, sales receipts for big-ticket items -- motor vehicles, aircraft, boats, a home or major home addition --and any previous residential addresses during the tax year. The calculator is anonymous and doesn't retain any information you enter.
Using the Calculator
Enter the tax year and select the applicable adjusted gross income range for that year. The next entries are the number of exemptions you claim on your return and the total sales tax you paid on big-ticket items. Enter your ZIP code as of the January 1 of the tax year, and if you moved during the year, enter the number of moves, the start dates of residency and the ZIP codes of each location. Confirm the information and the calculator will display your sales tax deduction, rounded to the nearest dollar.
Entering Your Deduction
If you live in a state or locality that assesses income tax, you need to figure this amount for the year to see if it exceeds your sales tax deduction. Enter the larger of the two deductions on Schedule A and indicate which one you've chosen. Enter your other deductions onto Schedule A, compute the total and transfer it to the "Itemized deductions" line of Form 1040. Attach Schedule A to your Form 1040 when you file your tax return.
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