Taxpayers Can Claim General Sales Taxes Instead of Income Taxes as Itemized Deduction
FS-2006-9, January 2006
Under the American Jobs Creation Act of 2004, taxpayers who itemize their deductions have the option of claiming either state and local income taxes or state and local general sales taxes. Taxpayers will indicate by a checkbox on line 5 of Schedule A which type of tax they’re claiming. Tax Year 2005 is the last year that the law allows taxpayers the option to deduct state and local general sales taxes, although pending legislation may extend this option to future years.
Generally, taxpayers can deduct the actual state and local general sales taxes (including compensating use taxes) paid in 2005 if the tax rate was the same as the general sales tax rate. However, sales taxes on food, clothing, medical supplies and motor vehicles are deductible as a general sales tax even if the tax rate was less than the general sales tax rate. Sales taxes on motor vehicles are also deductible as a general sales tax if the tax rate was more than the general sales tax rate, but the tax is deductible only up to the amount of the tax that would have been imposed at the general sales tax rate.
Optional general sales tax tables included in the Schedule A instructions give taxpayers a sales tax deduction amount as an alternative to saving their receipts throughout the year and tabulating the amount actually paid. Taxpayers use their income level and number of exemptions to find the sales tax amount for their state. The line 5 instructions explain how to add an amount for local sales taxes if appropriate.
Generally, taxpayers may add to the table amount any sales taxes paid on:
A motor vehicle, but only up to the amount of tax paid at the general sales tax rate;
and an aircraft, boat, home (including mobile or prefabricated), or substantial addition to or major renovation of a home, if the tax rate is the same as the general sales tax rate.
Motor vehicles include cars, motorcycles, motor homes recreational vehicles, sport utility vehicles, trucks, vans and off-road vehicles. Taxpayers may also include any state and local general sales taxes paid for leased motor vehicles.
While this deduction will mainly benefit taxpayers with a state or local sales tax but no income tax — in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — it may give a larger deduction to any taxpayer who paid more in sales taxes than income taxes. For example, a person may have bought a new car, boosting the sales tax total, or claimed tax credits, lowering the state income tax paid.
Other items to keep in mind:
Taxpayers who received refunds of state or local general sales taxes in 2005 for amounts paid in 2005 should reduce their 2005 state and local general sales taxes by this amount.
Taxpayers who received a refund of state or local general sales taxes in 2005 for prior year purchases should not reduce their 2005 state and local general sales taxes by that amount.
However, taxpayers who deducted state and local general sales taxes in the earlier year and the deduction reduced their tax may have to include the refund in income on Form 1040.
Schedule A instructions (PDF 135.1K)