The National State Sales Tax vs. State Income Tax Deduction

Many of the old-time tax preparers will remember when sales tax was allowable as an itemized deduction on Schedule A. That deduction was repealed with the 1986 Tax Reform Act. But, guess what, it’s back, although in a revised form. For tax years 2004 and 2005, taxpayers are going to be permitted to deduct their state and local sales tax in hen of the state income tax if it Is greater.

In the states that have no state income tax, which include Alaska, Florida, Nevada South Dakota, Texas, Washington, and Wyoming, this amounts to an additional itemized deduction. In the other states, one will want to compare their state income tax with the sales tax tables that are now in Internal Revenue Service Publication 600. In addition to the sales tax tables, one is given several choices, which might increase this particular deduction. First, one may keep track of the actual sales tax that they paid in tax years 2004 and 2005. One cannot use this deduction for sales tax paid on items acquired In a trade or business. Those particular sales taxes are already included in one’s expenses for their respective business and deducted on Schedule C, Schedule F, Form 1065, or Form 1120. One such example would be purchases or office supplies used in your trade or business, Also, one is allowed, in addition to the sales tax tables, to add any sales tax paid for motor vehicles such as automobiles, SUV’s, pick-up trucks, vans, and other similar vehicles.

In states such as New York, Massachusetts and California that have high state income tax rates, it Is highly unlikely unless one has unusual circumstances, that the sales tax will replace the state income tax as an itemized deduction. As indicated previously, in those states that have no state income tax, it will become a readily available itemized deduction. In the other states, such as Pennsylvania, one will want to compare their state and local income taxes with the sales tax tables, Particularly If one might have purchased a new vehicle which can be added to the table amount, or perhaps had some form of large home improvement on which they paid a large amount of sales tax on the materials. For example, in Pennsylvania, a family of 4 in which husband and wife earn $60,000, the state and local income tax would normally be $2,442. The state sales tax table is only $739. Therefore, in this instance, one would not choose the state sales tax as opposed to the deduction for state and local Income tax. However, assume the same couple acquired a new vehicle that cost $30,000, they would now have a sales tax on that vehicle in Pennsylvania of $1800. The addition of the $1800 to the table amount of $739 would give them a total state sales tax deduction of $2,539, greater than the state and local income tax previously indicated of $2,442. Thus, in this Instance, this taxpayer would choose the sales tax deduction instead of the state and local income tax deduction.

As previously indicated, this new portion of the law is in effect for tax years 2004 and 2005, Whether the Congress will extend it beyond 2005 is anyone’s guess. There are already proposals being presented by the Treasury to broaden the tax base. Should these measures become law, one might lose not only the optional sales tax deduction, but perhaps other already established itemized deductions as well.