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Investment Planning |
Deduction for Sales Tax
The American Jobs Creation Act of 2004 reinstated the itemized deduction for sales tax paid, effective for 2004. This law will help those who made large purchases, such as automobiles, trucks, boats, or building materials used in construction. Retirees and people who live in states without state income tax will also benefit.
How may you benefit?
All taxpayers are allowed a federal tax deduction for state income taxes paid. You may deduct either sales tax paid or state income taxes paid, but not both. The IRS has provided tables to calculate an average estimated sales tax amount, based upon income level and number of dependents. Unfortunately, the tables do not include sales tax estimates for those with incomes over $200,000. Therefore, those with higher incomes may benefit from actual sales tax receipts. If you’ve made a large purchase (like a car), you may add the sales tax paid to the calculated sales tax from the tables. Keep in mind that the tables are not accurate; their purpose is to estimate how much sales tax you’ve paid, without subjecting you to actually calculating the amount.
Planning Tip
Because their incomes are higher, most of our clients who live in California will not benefit from the sales tax deduction. Clients who have made large purchases during the year, or those whose incomes were lower may be exceptions. If you live in a state with a low sales tax rate or no sales tax, you may benefit by deducting your sales tax. Retirees will particularly benefit from the new law, since they may not pay a large amount of state taxes, but they do pay sales tax on the goods they buy.
Action Item
If we prepare your tax returns, we will automatically calculate your estimated sales tax deduction from the tables and compare it to the actual state taxes you paid through withholding and/or estimated tax payments. We’ll then deduct the higher amount. If you made any large purchases, please provide us with the amount of sales tax you paid on each purchase. Additionally, you may want to go back and try to calculate the actual sales tax you paid on all purchases last year. (Quicken and other software programs may help.) Most of our clients who have over $200,000 of income, lived in California during 2004, and made no large purchases involving sales tax generally will not benefit from the new sales tax deduction. Going forward, be sure to save sales tax receipts for large purchases, and provide them to us at tax time.
If you have any questions about the sales tax versus income tax deduction, please let us know.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.