Deductions for Sales Tax
Most states charge a sales tax on the purchase of goods sold within their jurisdictions. However, there are several tax-free states in which you can shop that do not impose a sales tax on retail purchases. But, regardless of whether you shop in a tax-free state or not, sales taxes can impact your federal tax return.
Key Takeaways
- You can benefit from shopping in the five U.S. states that don't impose a sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon, especially if you itemize deductions and opt for the state sales tax deduction.
- You have the option to itemize deductions on Schedule A, which can include sales tax. It's important to compare this with the Standard Deduction to see which is more beneficial for you.
- The IRS provides optional sales tax tables to help you estimate your sales tax deduction, which can be useful if keeping track of all your sales tax payments is challenging.
- If you live in a state that imposes sales taxes, be aware of use taxes for out-of-state purchases where no sales tax was collected. You're generally required to self-report these purchases and pay the use tax with your state tax return.
Tax-free states
As of this writing, Alaska, Delaware, Montana, New Hampshire and Oregon are the only five states that do not impose a sales tax. It isn’t necessary for you to be a resident of one of these states to shop there. In fact, doing some tax-free shopping in one of these states can save you money on your tax return if you itemize your deductions and take the state sales tax deduction. If you do this, you can’t deduct your state income tax payments too—you have to choose one or the other. The best part is that you can use the Internal Revenue Service optional sales tax tables to figure out how much your deduction will be.
Itemizing sales tax
The IRS gives you a choice between claiming the Standard Deduction and itemizing on Schedule A. Since you can take the larger of the two deductions, it’s important to compute the total of all expenses you incur that can be itemized and compare it to the Standard Deduction. TurboTax will calculate this for you and recommend the best choice.
The decision to itemize often includes considering the amount of sales tax you can deduct, even if you make all of your purchases in tax-free states and never even pay any sales tax during the year. You should also consider the actual sales tax payments you make on big ticket items, such as new cars or boats. This is because the IRS allows you to add these tax payments to the amount of sales tax you’re eligible to deduct when using the optional sales tax tables, which gives you an even bigger deduction.
TurboTax Tip:
When itemizing, you can add sales tax paid on big-ticket items like cars or boats to your state’s amount from the IRS tables, potentially increasing the amount you can deduct.
Optional sales tax tables
Unless you do all of your shopping in tax-free states, keeping track of the sales tax you pay on every purchase can be an incredibly daunting task, which is why the IRS allows you to estimate your sales tax deduction using the optional sales tax tables.
The nice thing about using the tables is that you qualify for the amount that corresponds to the state where you live, the range of income that includes the amount of your adjusted gross income (increased by certain types of tax-exempt income) and the total number of personal and dependent exemptions you take even if you don't pay a single dollar in sales tax. Additionally, if you live in a county or municipality that charges an additional rate of tax, such as New York City, you can increase your sales tax deduction even more. TurboTax will take care of these calculations to ensure that you get the best deductions for your specific situation.
Sales use tax considerations
States that impose sales taxes generally impose an equivalent amount of use tax for out-of-state purchases on which no sales tax has been collected. Accordingly, purchasing goods from a neighboring state or on-line where no sales tax has been collected subjects you to use tax in your state of residence. Most states require you to self-report your out-of-state purchases and remit the calculated amount of use tax, and many states are getting extremely aggressive in pursuing this source of revenue.
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