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Everyone has to spend to live, but wouldn’t it be great to get something back for the sales tax you pay on purchases throughout the year?
Taking the sales tax deduction on your federal income taxes could be a way to recoup some of your state and local sales tax costs. But as with anything tax-related, it’s important you understand how this deduction works, its limitations, and its possible pros and cons for your individual situation.
Let’s take a look at some things to know about the sales tax deduction.
When you pay your federal income taxes, you aren’t actually taxed on all the money you earn. You’re allowed to take deductions that reduce your taxable income.
You can either choose the standard deduction, or you can itemize your deductions (which is when you could opt to take the sales tax deduction). For 2019 taxes, the standard deduction is worth $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly.
Generally, itemizing only makes sense if all your itemized deductions will add up to more than your allowed standard deduction.
If you do decide to itemize, one of the deductions you’re allowed to take is for certain taxes you pay to state, local and foreign governments. These include taxes on income, personal property, real estate and general sales. This deduction is called the SALT deduction.
But you’d have a choice to make between two of those: You can either deduct state sales taxes or state income taxes, but not both. You’re allowed to deduct state and local property taxes no matter which other option you choose.
How the sales tax deduction got started
The Tax Cuts and Jobs Act of 2017 tinkered with the sales tax deduction, and it’s far from the first time the deduction has gone through some revision. The history of the sales tax deduction has been long and rocky.
In 1913, the 16th Amendment to the U.S. Constitution paved the way for the first permanent federal income tax. In the same year, the Revenue Act of 1913 allowed Americans to begin deducting all state, national, county, school and municipal taxes from their federal income taxes. But there were no state sales taxes at the time. In 1932, Mississippi introduced the first state sales tax, but it wasn’t until 1942 that state sales taxes were expressly added to the list of state and local taxes you could deduct.
In 1964, Congress tightened the rules for the sales tax deduction. Before, all state and local taxes were deductible unless specifically excluded by the tax code. The Revenue Act that year stated that to be deductible, state sales taxes had to be general taxes on retail sales.
Twenty-two years later, in 1986, Congress eliminated the sales tax deduction. In 2004, it came back as part of the American Jobs Creation Act. But that act stated that taxpayers couldn’t deduct both state income taxes and state sales taxes — they had to choose one.
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For those who opted to claim it, the sales tax deduction was permitted only temporarily under the American Jobs Creation Act. But legislation that followed extended the deduction again and again, until it was finally made permanent in 2015 by the Protecting Americans from Tax Hikes Act.
The 2017 Tax Cuts and Jobs Act kept the sales tax deduction in place but imposed new limits for taxpayers on all state and local deductions. Under this tax reform bill, taxpayers are now limited to deducting a maximum of $10,000 ($5,000 for married filing separately) in state income taxes and property taxes combined or state sales taxes and property taxes combined. This limitation on the SALT deduction remains in effect until 2026.
Should you claim the sales tax deduction?
If you itemize your taxes, your goal is likely to reduce your taxable income as much as possible. Itemizing means you’ll need to determine if you’d save more on your federal taxes by deducting your state income taxes or sales taxes.
If you have receipts for purchases, you’re allowed to deduct the actual amount of sales tax you paid out of pocket during the course of the year up to the $10,000 combined SALT deduction cap. But if you don’t keep track of your purchases, you can use the Optional State Sales Tax Tables (from the instructions for Schedule A of Form 1040) to calculate the amount you may be able to deduct for sales tax.
These tables list a specific deduction amount based on where you live, your income, and the number of exemptions you claim. For example, in 2017, an Alabaman with an income between $20,000 and $30,000 and one exemption was allowed to deduct $368 in state sales tax plus applicable local taxes, while a Californian with an income over $300,000 and one exemption was allowed to deduct $2,220 in state sales taxes, plus applicable local taxes.How did tax reform affect deductions? Learn more.
Add up your sales tax paid or use the IRS sales tax tables to figure out how much you could deduct. Then compare this to how much state income tax you paid to determine which deduction you should claim. If you live in a state with no income tax, you may find claiming the sales tax deduction helpful. Or if your state does have income tax, you may opt to take the sales tax deduction in years when you made a lot of large purchases.
How to claim a sales tax deduction
First, you need to live in a state, county or municipality that actually levies a sales tax. Currently, all states have a state-level sales tax except Alaska, Delaware, Montana, New Hampshire and Oregon. Each state sets its own sales tax rate and decides what goods and services the tax will apply to. Thirty-eight states have local sales taxes.
If you live in a state or locality that has a sales tax and decide to claim the sales tax deduction, you’ll need to itemize and submit a Schedule A form along with your Form 1040 tax return. Your Schedule A lists all itemized deductions you’re claiming, while Form 1040 is the standard form used to report gross income.
A free tax-filing service can simplify the process of itemizing. Credit Karma Tax® supports Form 1040 and Schedule A, and can help you identify deductions (such as the sales tax deduction) that you may be eligible to claim. Credit Karma Tax can also help you determine if itemizing or taking the standard deduction will yield a bigger benefit.
If itemizing your deductions gives you a bigger reduction in taxable income than the standard deduction, the sales tax deduction is worth a look under certain circumstances. If you’ve made a lot of big purchases (and paid a lot of sales tax), or your state has no income tax, it might make sense to include the sales tax deduction in your list of itemized deductions.