Economy & Jobs

The Sales Tax Deduction – A Key Benefit for States With No Income Taxes

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The American tax code is riddled of underused deductions, many of which are unknown to the common taxpayer. This often leads to overpayment when April rolls around. One such benefit that you might have overlooked is the state and local sales tax deduction. This can be a significant tax break for some, especially if you live in a state with no income taxes.

How the Sales Tax Deduction Works

The IRS lets you claim some of the state and local taxes you pay as a deduction to lower your federal tax bill. Each year, you can choose between deducting your state and local income taxes or deducting your state and local sales taxes. You can’t deduct both.

Most people can get a larger deduction for their state income taxes, but this isn’t always the case. If you made a number of large purchases throughout the year, it’s possible that you paid more in sales tax. If this is the case, you could end up with a larger deduction.

Navigating Sales and Income Taxes Around the U.S.

If you live in one of the nine states without income taxes, the choice is simple. But for those living in the other 41 states, deducting your sales tax could still be beneficial. The states with sales tax but without income tax include: Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee only taxes your investment income, not your wages, so the sales tax deduction is a good choice in this state as well. Keep in mind, however, that there are five states without state sales tax: Alaska (which also has no income tax), New Hampshire (which only taxes investment income), Delaware, Montana, and Oregon.

Claiming the Deduction

To claim the state and local sales tax deduction, you will need to itemize your deductions. To itemize, add up the value your approved expenses. Expenses such as mortgage interest, donations to charity, and unreimbursed work expenses count toward your itemized total, as does the amount you paid in state and local sales tax.

If you choose to go the standard deduction route, like the average two-thirds of Americans, keep in mind that the standard deduction for 2014 is $6,200 if you are single and $12,400 if you file as a married couple. For itemizing to be worthwhile, the total of your deductible expenses should be higher than those amounts.

Calculating Your Itemized Deductions

There are two ways to calculate your total sales tax deduction. First, you can manually keep track of your receipts throughout the year to record exactly how much you paid in sales taxes. If you don’t want to calculate this manually, however, the IRS provides a free online calculator. Their calculation looks at your total income, number of dependents, and the state and local sales tax rates in your area to estimate the amount you paid in sales taxes.

Most of the time, it’s easiest to use the online calculator rather than going through the hassle of tracking all of your receipts. However, if you’ve made some large purchases over the past year, such as a car, electronic equipment, or furniture for your house, totaling your receipts could be worthwhile. The IRS calculation only takes into account average spending and doesn’t record large, big-ticket items. You could be shortchanging your deduction by not manually tracking receipts.

Don’t let all your hard-earned money go to waste. By keeping the sales tax deduction in mind, you’ll have one more strategy under your belt when it comes to lowering your tax bill this year.