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How Can Sales Tax Save You Money?

Aug 17, 2007
It's that time of the year again. Tax time! It may not be one of the more enjoyable times of the year, but it is definitely one of the more important dates on the calendar. Hopefully, you have listened to all the advice and have started planning in advance.

If so, you probably already know that the government has introduced a new way for you to lower your federal taxes, maybe even dramatically lower your taxes; you now have the choice to claim your state sales tax to lower your taxable income on your federal tax return.

Deducting your sales tax in the US

While you used to be able to deduct amounts paid in state sales tax, Congress took it off the books in the Tax Reform Act of 1986. Thanks, Congress. Fortunately, it is now back. Depending on your specific circumstances and where you live in the US, this could be extremely important for your tax planning.

Deducting your state income tax vs. state sales tax

The change in the law means you now have the choice between deducting your state income tax vs. your state sales tax. No matter what you choose, however, you have to first decide to itemize your deductions.

Instead of going through the process of itemizing your deductions, the IRS gives you the opportunity to take a pre-determined deduction from your taxable income, based on your income level and state of residence. According to the IRS, most people will simply chose the pre-determined number; as many as 66% of all tax payers take the easy way out.

For some people, the pre-determined numbers is going to be the better choice. A lot of the people who choose the pre-determined deductions, however, are doing so for the sake of simplicity. Plan ahead and make sure you are picking the best option before signing on for the pre-determined deductions.

The ability to deduct amounts paid in state sales tax could significantly lower the amount of money you end up paying in income tax, or at least lower than what you would pay under the pre-determined deductions.

This ability is particularly important if you live in one of the few states - Wyoming, Washington South Dakota, Tennessee, Florida, Texas and Nevada, where there is no state income tax. Previously, if you were a resident of this state you could not claim any state tax deductions.

Now, thanks to the new rules, if you are a resident of one of these lucky states you can now claim their state sales tax to reduce their taxable income on their US tax forms.

When will you be better off deducting your state sales tax? If you have made any significant purchases, such as a car, a boat, an airplane, luxury items or major events such as a wedding. The sales tax you paid last year could be more than you paid in state income taxes.

Save your receipts!

The most important thing to get your finances in order is to start planning for tax time now. The ability to deduct amounts paid for state sales tax will only be useful if you have the receipts to back your itemizations up.

Make sure you hold on to receipts for your expensive items, and fight the natural instinct to take the easy way out and select the pre-determined deduction.

If you have paid a lot of state sales tax in the US, this is your chance to pay less tax to the federal government.
About the Author
Steve Dolan has the good fortune to be married to a CPA so out of death and taxes he has one covered. Find out about sales tax issues at Sales Tax and Save Taxes and for general tax info go to Tax and Taxes
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