Tax Tip: Choose the 'Biggest and Best' State Tax Deduction

Are your clients better off deducting income tax or sales tax on a 2011 return? It depends on the situation. But they should be made aware of a special tax break for sales tax deductions.

 

An itemizer on a 2011 return can deduct annual state and local income taxes or, as an alternative, sales tax paid during the year. But it's either one or the other. For residents of states with no income tax, or states with a relatively low income tax rate, the decision to deduct sales tax is a no-brainer. But taxpayers in high-tax states must do both calculations and compare. Then you can simply choose the deduction that produces the better tax result. 

 

Because few taxpayers keep all the receipts needed to back up a sales tax deduction, the IRS conveniently allows you to claim an amount based on its state-by-state tables, found on page A-11 of the 1040 Schedule A instructions. The amount is based on the taxpayer's income and number of exemptions. Of course, the IRS-approved amount is likely to be lower than the amount of actual sales tax paid during the year, but it's a lot easier to figure out.

 

Icing on the cake: If your client bought a vehicle or a boat in 2011, the amount of the sales tax may be added to the amount already listed in the IRS tables. This also applies to sales taxes paid on the purchase of a home, including a mobile home or a prefabricated residence as well as home building materials. The extra write-off could provide an edge to the sales tax deduction over state and local income taxes.

 

Although the alternative deduction for sales tax officially expired after 2011, it's expected to be renewed again for 2012. But don't hold your breath.