Business taxpayers can generally deduct the sales taxes they pay as an ordinary and necessary cost of doing business. But the situation is quite different for individual taxpayers, and this is where our focus will be for this discussion.
Yes, the tax code allows you as an individual to deduct the sales tax you paid during your tax year but, first, you must meet certain conditions. And then, if you meet those conditions, you will also need to figure out whether taking a sales tax deduction is to your advantage. Just because you can take the deduction does not always mean you should. Please let me explain what I mean.
Can I take the deduction?
State and local sales taxes are deducted on the form known as Schedule A,
Itemized Deductions, which an eligible person would attach to their Form 1040,
U.S. Individual Income Tax Return. But Schedule A can only be used if the total of the taxpayer’s deductions for state and local taxes, mortgage interest on their primary residence and one other property, charitable contributions, and all medical expenses that were greater than 7.5% of their adjusted gross income (AGI), exceeds the following amounts for their filing status in 2022:
- Married Filing Jointly or Qualifying Widow(er): $25,900
- Head of Household: $19,400
- Single or Married Filing Separate: $12,950
Just to clarify, “state and local taxes” on Schedule A are based on the total you paid for each of the following:
- State and local income taxes, OR, State and local general sales taxes,
- State and local real estate taxes, and
- State and local personal property taxes.
And just to throw another wrench into the works, the total amount you are allowed to claim as a deduction for the year for the total of these taxes is limited to $10,000 (or $5,000 if your filing status is married filing separately).
But if the total of your itemized deductions (including the sales taxes you paid) exceeds the dollar amount for your filing status, then you are good to go. You can take the sales tax deduction.
This now brings us to the second question in our discussion.
Should I take the deduction?
Of course, in general, you should take all deductions that you’re legally entitled to take but, in this case, we need to think before taking action. You may have noticed above that among the taxes you can deduct on Schedule A, you can claim
either your state and local
income taxes or your state and local
general sales taxes. Since you cannot claim both, it would obviously be to your advantage to take the higher of the two. If you live in a state with no income taxes, such as Texas, then taking the deduction for sales taxes would be the clear choice. In another state, such as California, you would need to compare the amounts you spent for state and local income taxes against your state and local sales taxes.
But calculating how much you spent on sales tax during the year is not simple, because most of us do not keep receipts for all of our purchases. However, the IRS offers an
online calculator which provides an estimated amount for sales tax expenses based on a taxpayer’s location, income, and size of household. The most practical solution is to use the amount from the IRS estimate based on its state and local sales tax tables and add to that number any other local general sales taxes imposed in your location. You should also add to this amount any sales tax you paid during the year on any large purchases, such as motor vehicles, boats, or mobile homes.
Once you have armed yourself with this information about the total of your potential deduction for sales tax, it then becomes a simple matter to decide whether to take that deduction or take the deduction for state and local income tax instead. However, if the property taxes and real estate taxes in your area are high, then this choice will probably not matter much as you will easily reach the $10,000 (or $5,000) limit.
But for those in low-tax states who qualify to itemize their deductions, they not only can take the deduction, they also should!