IRS Guide for Computing State & Local Sales Taxes
If you itemize deductions on your federal income tax return, you have the option of deducting either state and local sales taxes or state and local income taxes -- but not both. If you choose to take the sales tax deduction, the Internal Revenue Service gives you two ways to compute the amount you paid.
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Actual Expenses
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The first way to compute state and local sales taxes is to simply dig up all your receipts from the past year and add up how much you paid in such taxes. If you choose this method, you can deduct all sales tax you paid on items that were taxed at the "general" rate. For example, the general sales tax rate for all of Iowa as of 2010 was 6 percent, so Iowa residents could deduct the taxes they paid on all items taxed at 6 percent. If a state or locality taxes certain items at a rate different than the general rate -- whether higher or lower -- you generally can't deduct those taxes. However, the IRS allows limited exceptions to this provision: Special sales taxes on food, clothing, medical supplies and motor vehicles are deductible if the rate is lower than the general rate. And if a motor vehicle sales tax is higher than the general rate, you can take a deduction up to the amount you would have paid under the general rate.
Saving Receipts
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The IRS cautions that in order to claim actual sales-tax expenses, you must save receipts showing how much you paid. If you failed to save a particular receipt, you can't claim any taxes that were on it, even if you know exactly how much you paid.
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Tax Tables
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If you didn't save your receipts -- or even if you did but they don't add up to much -- the IRS offers another way to compute your state and local sales tax deduction. The instructions for Schedule A, the form on which you itemize your deductions, include "Optional Sales Tax Tables." These tables give you an amount you can claim based on the state and locality where you live, your income and the number of exemptions you claim on your tax return. You use the optional tables in conjunction with the "State and Local General Sales Tax Deduction Worksheet," also included in the Schedule A instructions. This worksheet makes adjustments to your deduction based on your local sales tax rate, if any. The worksheet also allows you to increase your optional deduction by adding in sales taxes you've paid on motor vehicles and homes. The IRS offers an online utility that does all the calculating for you (see Resources).
States Without Sales Taxes
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Four states have no sales tax: Delaware, Montana, New Hampshire and Oregon. These states do not have entries in the Optional Sales Tax Tables. Alaska does not have a statewide sales tax, but it has local sales taxes. The optional tables include a local table but not a state table for Alaska.
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