How the IRS Can Help With Sales Tax Tables

Thanks to the American Rescue Plan, the IRS has now expanded its list of nontaxable items. In part four of his five-part series, Julian Block discusses what this means for clients and how to use government sales tax tables to make things easy for yourself.

Apr 22nd 2021
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In case you just joined us, here’s a recap of the previous three columns. Part one explained that Form 1040’s Schedule A allows itemizers to deduct state and local income taxes or to deduct state and local general sales taxes. They can’t write off both in the same year (line 5a of 2020’s Schedule A for itemized deductions).

Part two discussed breaks on deductions for sales taxes for residents of states with low rates for income taxes and for seniors who live in states that authorize lower rates, exemptions and other kinds of special breaks for retirement income.

Part three explained how itemizers can add to the amount authorized by the “Optional sales tax tables” their actual payments on the purchase (or lease) of certain big-ticket items like cars, aircraft and boats.

Part four discusses the sales tax tables and focuses on help available at irs.gov. The agency’s site offers an online tool designed to help perplexed taxpayers—or even paid preparers for that matter—calculate the IRS-blessed deduction.

Take it from someone who’s the quintessential low-techie. The IRS’s sales tax calculator makes it easy to determine the deduction.

An example: Like most itemizers, Sydney and Lucie Carton gravitate to the calculator. It shows the allowable deduction, determined by income level, family size and state of residence. The advantage for the Cartons of taking the deduction from the official tables is that ordinarily the IRS isn’t going to ask them to break down sales tax payments in the event of an audit.

The Cartons should think of the calculator as a sort of virtual confessional that does everything anonymously; the IRS doesn’t ask for names, Social Security numbers or any other identifying information. In the event of a potential audit, the couple should print out a copy of the results to explain how they arrived at the deduction.

For purposes of using the tables, the couple starts with adjusted gross income (line 11 of 2020’s Form 1040), plus certain nontaxable income that increases their purchasing power. The IRS’s definition: “any nontaxable items, such as tax-exempt interest; veterans’ benefits; nontaxable combat pay; workers’ compensation; nontaxable part of social security and railroad retirement benefits; nontaxable part of IRA, pension, or annuity distributions (except rollovers); and public assistance payments.”

This past March, the IRS expanded the list of nontaxable items. The agency needed to add the nontaxable part of unemployment compensation, because the ARP, short for the American Rescue Plan Act of 2021, signed by President Biden on March 11th, includes a provision that retroactively exempts from tax the first $10,200 of unemployment benefits received in 2020 by qualifying individuals.

While the provision provides significant relief for millions of laid-off workers, it doesn’t help all workers. The ARP imposes an income cap on who qualifies for the exemption; there’s relief only for someone whose MAGI, short for modified adjusted gross income, is under $150,000.

S’pose the Carton’s MAGI is $1 south of $150,000; they’re entitled to tax-free treatment for the first $10,200. S’pose it’s $1 north of $150,000; they’re not entitled to tax-free treatment.

The IRS dispensed some advice for individuals who already filed 1040s under the then-correct assumption that they had to report all of their unemployment benefits. The day after Mr. Biden signed the ARP, an under-staffed and under-funded IRS announced that it “strongly urges” those who submitted 1040s “not to file amended returns or take other unnecessary steps at this time” in order to obtain refunds.

The announcement also emphasized they shouldn’t file amended returns at this time until the IRS issues additional guidance. To ease their concerns, the agency promised that it would automatically send refunds to those who qualify. AccountingWeb will alert the accounting community on whether a promise made proves to be a promise kept.

Spoiler alert for part five. It focuses on why wannabe itemizers like Sydney and Lucie Carton might discover that it’s not worthwhile for them to claim Schedule A deductions for state and local general sales taxes. Their total write-offs on Schedule A are nowhere near the standard deduction amounts that are available to nonitemizers (line 12 of 2020’s 1040 and 1040-SR).

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