Taxpayers Can Claim General Sales Taxes Instead of Income Taxes as Itemized Deduction

FS-2006-9, January 2006

Under the American Jobs Creation Act of 2004, taxpayers who itemize their deductions have the option of claiming either state and local income taxes or state and local general sales taxes. Taxpayers will indicate by a checkbox on line 5 of Schedule A which type of tax they’re claiming.  Tax Year 2005 is the last year that the law allows taxpayers the option to deduct state and local general sales taxes, although pending legislation may extend this option to future years.

Generally, taxpayers can deduct the actual state and local general sales taxes (including compensating use taxes) paid in 2005 if the tax rate was the same as the general sales tax rate. However, sales taxes on food, clothing, medical supplies and motor vehicles are deductible as a general sales tax even if the tax rate was less than the general sales tax rate. Sales taxes on motor vehicles are also deductible as a general sales tax if the tax rate was more than the general sales tax rate, but the tax is deductible only up to the amount of the tax that would have been imposed at the general sales tax rate.

Optional general sales tax tables included in the Schedule A instructions give taxpayers a sales tax deduction amount as an alternative to saving their receipts throughout the year and tabulating the amount actually paid. Taxpayers use their income level and number of exemptions to find the sales tax amount for their state. The line 5 instructions explain how to add an amount for local sales taxes if appropriate.

Generally, taxpayers may add to the table amount any sales taxes paid on:

• A motor vehicle, but only up to the amount of tax paid at the general sales tax rate;
• and an aircraft, boat, home (including mobile or prefabricated), or substantial addition to or major renovation of a home, if the tax rate is the same as the general sales tax rate.

Motor vehicles include cars, motorcycles, motor homes recreational vehicles, sport utility vehicles, trucks, vans and off-road vehicles. Taxpayers may also include any state and local general sales taxes paid for leased motor vehicles.

While this deduction will mainly benefit taxpayers with a state or local sales tax but no income tax — in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — it may give a larger deduction to any taxpayer who paid more in sales taxes than income taxes. For example, a person may have bought a new car, boosting the sales tax total, or claimed tax credits, lowering the state income tax paid.

Other items to keep in mind:

• Taxpayers who received refunds of state or local general sales taxes in 2005 for amounts paid in 2005 should reduce their 2005 state and local general sales taxes by this amount.
• Taxpayers who received a refund of state or local general sales taxes in 2005 for prior year purchases should not reduce their 2005 state and local general sales taxes by that amount.
• However, taxpayers who deducted state and local general sales taxes in the earlier year and the deduction reduced their tax may have to include the refund in income on Form 1040.

Related Item:

Schedule A instructions (PDF 135.1K)

New State Sales Tax Calculator Debuts on IRS.gov

IR-2007–19, Jan. 29, 2007

“The Sales Tax Calculator is another interactive tool on the IRS.gov web site designed to help make it easier for taxpayers to figure their taxes,” said IRS Commissioner Mark W. Everson.

Taxpayers who itemize deductions on Schedule A of the Form 1040 in 2006 have the option of deducting the amount of state and local sales taxes paid instead of deducting their state and local income taxes paid. Taxpayers cannot take a deduction for both sales and income taxes.

New tax law enacted in late December reinstated the optional deduction for state and local sales taxes. Because of this late enactment date, the IRS previously announced that it would not begin processing returns claiming the sales tax deduction until Feb. 3.

To use the Sales Tax Calculator, taxpayers input their adjusted gross income, number of exemptions and zip code. The IRS estimates most taxpayers will get an answer in less than five minutes using the new tool.

The calculator is anonymous. Taxpayers do not need to enter their name, Social Security number or any other identifying information. The calculator is another in a series of steps the IRS is taking to reduce taxpayer burden.

As an alternate to the online sales tax calculator, taxpayers can use the worksheet in Publication 600, State and Local General Sales Tax, posted on IRS.gov and mailed in early January to about six million individuals who received the Form 1040 tax package.

To calculate what their sales tax deduction would be, taxpayers can use either the actual amounts paid or use sales tax tables that allow them to factor in the exact sales taxes paid on certain specified items, such as a car, boat or material to build a house.

If you file a Form 1040, and itemize deductions on Schedule A, you have the option of claiming either state and local income taxes or state and local sales taxes. (You can’t claim both.) If you saved your receipts throughout the year, you can add up the total amount of sales taxes you actually paid and claim that amount.

If you didn’t save all your receipts, you can still choose to claim state and local sales taxes. You could fill out the worksheet and use the optional general sales tax tables in Publication 600, State and Local General Sales Taxes (for 2006 tax returns) or 2005 Instructions for Schedules A & B (Form 1040) (for 2005 tax returns) – but why not take the easy route and use the Sales Tax Deduction Calculator!

Sales Tax Deduction Calculator - Frequently Asked Questions

Does the Sales Tax Deduction Calculator use a methodology that differs from the worksheet in 2006 Publication 600 and the 2005 Schedule A instructions?

No. However, it has built into it information on local sales tax rates, which are not contained in the paper instructions. It also does the math for you.

Why is this methodology called “optional”?

Because this is in lieu of your having to add up all of your general sales tax payments from your receipts, which you are always entitled to do.

Will the IRS retain any information about me when I use the calculator?

No. Although we do not use or retain any personal information about users of our web site, we do compile general usage statistics, such as the number of visits, the number of page views, etc.

Why aren’t the “specified items” already accounted for in the tables, etc.?

These “big ticket” items are generally not purchased every year. If an average annual amount were included in the tables for these purchases, then taxpayers would be able to get double benefit for them: using their actual receipts in years when they purchased such items, but using the tables in all other years. As a result, the law provides for such items to be accounted for outside of the tables entirely.

Why are there different methodologies for determining one’s local optional sales tax deduction, depending on one’s state or locality?

There are two key features of a general sales tax: what is taxed (the tax base), and how much it is taxed (the tax rate). Among the states that have local sales taxes, these two features create three basic categories:

1. Those in which the local tax base is the same as the state tax base and there is just one local sales tax rate throughout the state—in this case (e.g., Virginia), the local sales tax amount can be included with the state table using a combined rate on the same items.
2. Those in which the local tax base is the same as the state tax base, but the local sales tax rates vary throughout the state—in this case the local sales tax amount can be derived from the state amount using the ratio of the local rate to the state rate.
3.  Those in which both the local tax bases and the local sales tax rates vary throughout the state—in this case the local sales tax amount must be derived independently from the state amount. 

Is it necessary to tell the Sales Tax Deduction Calculator that I made a local move (within the same state and ZIP Code)?

Not if you’re sure that you stayed within the same local taxing jurisdiction. Many ZIP Codes contain more than one local taxing jurisdiction, however. If you changed your City or County of residence (even within the same ZIP Code), then you should enter your new residence separately in the Calculator.

Why are the residents of Salem County, New Jersey entitled to deduct only half of that state’s table amount?

By virtue of New Jersey law, the state sales tax rate in Salem County is half of the statewide rate.

Using the Sales Tax Deduction Calculator

To figure the amount of optional general sales tax you are eligible to claim, just answer a few online questions and the system does the rest. First select either 2006 or 2005. Then, using your ZIP Code and just a few entries from your draft Form 1040, the Sales Tax Deduction Calculator will automatically figure the amount of state and local sales tax you can claim. You will see the results from your entries immediately on your computer screen. Even if state and local sales tax rates changed during the year (e.g., due to changes in state and local rates or because you moved your personal residence), the Sales Tax Deduction Calculator can handle it.

Your entries are anonymous and the information is collected solely to allow you to determine your total allowable deduction. All entries are erased when you exit or start over. See the “IRS Privacy Policy” below for more information.

Ready to start? Continue to the Sales Tax Deduction Calculator.