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Video: What You Should Know About Shopping in Tax-Free States

Updated for Tax Year 2018


OVERVIEW

If you live in a state that doesn't charge a sales tax, consider yourself lucky, since 45 of the 50 states do charge the tax on goods you purchase there. Watch this video to find out more about shopping in tax free states and how this may affect your taxes.


 

 

Video transcript:

Hello, I'm Jill from TurboTax with some important information for taxpayers who shop in states that don't have a sales tax.

If you live in a state that doesn't charge a sales tax, consider yourself lucky, since 45 of the 50 states do charge the tax on goods you purchase there.

If you live in a state that charges sales tax but shop in one that doesn't, you may need to consider whether you have an obligation to pay a use tax in your home state.

A use tax is similar to a sales tax and generally works the same way in all states that impose it. Take this scenario, for example: suppose you live in a state that charges a 6-percent sales tax and you purchase items in a neighboring state that doesn't have a sales tax. Your home state may then require you to pay a use tax for bringing those tax-free items into the state, generally at the same rate it uses for sales tax, but it's always a good idea to double-check with your state's rules.

These sales and use taxes can also affect your federal tax return, but in a good way.

When you itemize deductions on your federal return, the IRS allows you to choose between a deduction for your state income tax payments and your sales tax payments, whichever provides the bigger deduction. (Beginning in 2018, the maximum deduction for all state and local taxes, including sales taxes, is limited to $10,000.)

You may already be thinking about all the receipts you will need to save, but fortunately, you can estimate your deduction using the optional sales tax tables in the instructions to Schedule A. The tables base your estimated sales tax payments on your income, the number of exemptions you claim and the sales tax rate of the state you live in.

The nice thing about using these tables to calculate your deduction is that it doesn't matter whether you do a lot of shopping in one of the five tax-free states or not. Your deduction is always based on the sales tax rate that your home state charges.

But remember, there is no requirement that you use these tables to calculate your deduction. If you do save your receipts or make some large purchases, you can deduct the actual sales and use tax payments you make.

Not sure which form to use? When you file with TurboTax, you don't need to know a thing about tax forms. We'll ask you simple questions and determine the filing status and forms that will give you your biggest tax refund.

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