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Drive Away with a Bigger Sales Tax Deduction

Dec 20th 2016
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Are you in the market for a new car or SUV? Besides intriguing year-end deals being offered by dealers, a unique tax incentive may be too good to pass up: The chance to add to your state sales tax deduction.

But this tax-saving opportunity isn’t available to everyone.

For starters, you can choose to deduct either the state and local income taxes or the sales taxes you pay on your personal income tax return. But you’re only entitled to a deduction for one or the other.

The optional deduction for state and local sales taxes, which had expired and been reinstated several times in the past, was finally made permanent by the Protecting Americans from Tax Hikes Act of 2015.

If you live in a state with high income taxes, like California and New York, you’ll usually be better off claiming the state income tax deduction. Conversely, if you reside in a low-tax state or one of the seven jurisdictions with no income tax at all – Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming –  choosing the sales tax deduction is a no-brainer.

Assuming you opt for the state and local sales tax deduction, the amount you can write off is based on your actual expenses, supported by receipts or other documentation.

Alternatively, you may elect to use a state-by-state table provided by the IRS, based on your income and the size of your family. As a general rule, you’ll come out ahead with a deduction for actual expenses, but most taxpayers don’t bother to keep adequate records.

There is, however, another way the IRS sweetens the pot: If you use the state-by-state table, you can deduct the listed amount plus the sales tax paid on certain “big-ticket items.”

The list of big-ticket items includes:

  • The purchase or lease of a vehicle.
  • The purchase of a boat or aircraft.
  • The purchase or substantial addition or renovation of a home.

Thus, buying a new car could significantly boost your deduction for state and local sales tax. For example, if you’re a resident of Michigan with a family of four and an annual income of $125,000, the table amount for your situation is $1,025. If you buy a new vehicle before the end of 2016 and pay $3,000 in state sales tax, your deduction is increased to $4,025, assuming you’re using the IRS table on your return. And, if you deduct actual sales tax paid, your deduction also jumps by $3,000.

Of course, other factors will affect your year-end decisions. Nevertheless, keep this tax break in your hip pocket if it works for your situation.