Did You Deduct Your Sales Tax Last Year?

Posted on 23. Feb, 2006 by in Taxes

salestax.jpgI’m going to venture out on a limb here and guess that most of you didn’t take the opportunity to deduct the sales tax you paid in 2004 on your 2005 income tax return – why? Because, just like most every other tax law, its obscure and not brought up very often – except when you’re looking for it.

The tax provision I’m talking about allows millions of people to choose to deduct either their state and local income taxes or their sales taxes. Obviously, this provision applies mostly to people who live in states with no income tax such as Florida, Texas, Washington and Nevada – but for residents of those states, the deduction could be valuable.

There are two ways of calculating your sales tax deduction – the easy way, and the hard way. The hard way is to use your actual receipts from the entire year (time to empty out that shoe box). The easy way is to use the IRS’s tables plus the actual taxes you paid on motor vehicles, boats and certain other items.

A recent report by the Treasury Inspector General for Tax Administration, or TIGTA, found more than 33 million tax returns for 2004 with itemized deductions. Of those returns, there were about 1.1 million, or 3%, on which the taxpayer could have claimed — but didn’t — either a state income-tax or a sales-tax deduction. Taxpayers living in states without a state income tax were “four times more likely to omit the sales-tax deduction than taxpayers living elsewhere.” Taxpayers living in those states filed nearly 5.1 million returns with itemized deductions — and more than 465,000 of those returns, or 9%, didn’t claim the sales-tax deduction.

The IRS has taken steps to make the deduction more well-known this year but the WSJ reports that even this may not solve the problem.

For example, some people who live in places that impose state or local income taxes may erroneously assume they’re always better off taking the deduction for income taxes. Many people who pay very little state or local income tax may be better off claiming the sales-tax deduction — especially if they made big-ticket purchases such as a car or boat. (Note: You can’t deduct state or local income taxes, or general sales taxes, in calculating the alternative minimum tax, says the Ernst & Young Tax Guide 2006.)

The point is, it’s not too late to claim the deduction this year. And perhaps more importantly, it’s not too late to deduct it for previous years either – just file an amended return.

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