Sales tax deduction: What you should know

If you live in a state with high sales tax or you’ve made some large purchases this year, you may benefit from the sales tax deduction.

What is a sales tax deduction?

The sales tax deduction lets you write off all state and local sales taxes for the year. It reduces your tax bill dollar for dollar.
When you file your taxes, you can either write off sales tax or state and local income tax — but the IRS won’t let you do both. You must also itemize the deduction to claim it.

How much is the sales tax deduction in 2019?

The sales tax limit for 2019 is $10,000, or $5,000 if you’re married and filing separately. These are for taxes due in April 2020. This limit includes property and sales tax combined. The 2020 sales tax deduction, for taxes due in April 2021, remains unchanged.

Limits

Sales taxes are deductible, but there are limitations:

• You must itemize

  The IRS doesn’t allow taxpayers to claim the sales tax deduction using the standard deduction.

• Can’t claim income tax

  If you write off sales tax, you can’t deduct any state, local or foreign income tax from your return. The IRS requires you to choose one or the other.

• Can only claim sales tax in the current year

  You can’t claim any sales tax from previous years on your current tax return.

How much was the sales tax deduction worth in previous years?

The deduction limits changed in 2018 with the Tax Cuts and Jobs Act. Below are the figures for the sales tax deduction in 2018, 2017 and 2016:

Who qualifies for the sales tax deduction?

Anyone who pays state or local sales tax qualifies for the deduction. But whether you should claim it depends on a few factors.

If you answer “yes” to these two statements, then you should take the deduction:

• You paid more in sales tax than you did in income tax this year
• You get a larger tax refund if you itemize instead of taking the standard deduction

How to calculate the sales tax deduction

There are two different methods you can use to calculate the sales tax deduction: the actual expense method or the optional sales tax table method. Or you can use a combination of both.

• The actual expense method

  For the actual expense method, you’ll need to keep up with all your receipts for the year. This includes receipts for big, one-off purchases like cars and boats, as well as smaller, everyday purchases like groceries and clothing.

• The optional sales tax table method

  You don’t need to keep track of any receipts if you use the optional sales tax table method. Instead, you take an estimated deduction.

  Calculate your estimated deduction using the IRS Sales Tax Calculator based on your state, county and local sales tax rates.

• Using both methods

  You can use a combination of both methods if you don’t want to keep up with receipts but bought a boat, car, airplane or made home improvements.

  In this case, you estimate your deduction using the optional sales tax table method. Then you add in the sales tax for any boats, cars, airplanes or home improvements you made this year.

What qualifies for the sales tax deduction?

Popular items you can claim under the deduction include:

How to claim the sales tax deduction

You’ll use Schedule A and Form 1040 to claim the sales tax deduction. Here are the steps you should take:

1. Gather all of your purchase receipts and add up your total paid sales tax for the year.
2. Use the IRS Sales Tax Calculator to calculate your estimated deduction. Compare this amount to your total in Step 1 and use the method that results in the larger deduction.
3. Report your total sales tax deduction on line 5a of Schedule A. Be sure to check the box next to line 5a to let the IRS know you’re claiming sales tax instead of income tax.
4. Itemize the rest of your deductions using Schedule A, then take the number listed on line 17 of Schedule A and enter it on line 9 of Form 1040 or 1040-SR.

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What to watch out for

Keep the following in mind if you plan on claiming the sales tax deduction:

• Special rule for married, filing separately. If one spouse chooses to deduct the sales tax instead of the income tax, the other spouse must do the same. You both must use the same method to claim it.
• Itemizing may not save you more money. You should only itemize if the total of all your deductions is greater than your standard deduction, which ranges from $12,200 to $24,400 depending on your filing status. Otherwise, taking the standard deduction will save you more money.
• Keep detailed records of expenses. Claiming the deduction using the actual expense method requires thorough bookkeeping. Make sure you keep track of any receipts, checks and bank statements proving you paid sales tax.

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Related tax credits or deductions

There are other credits and deductions similar to the sales tax deduction that can lower your tax bill even more. These include:

• State and local tax deduction. If you decide you’d rather claim state, local and foreign income tax instead, you’ll do that using the state and local tax deduction, also known as SALT.
• Electric vehicle tax credit. You could save up to $7,500 on taxes if you bought a qualified plug-in electric or hybrid vehicle this year.
• Vehicle tax deductions. You can deduct operational costs from your taxes if you’re self-employed and use your car for work.

Bottom line

If you made some major purchases this year or live in a state with high sales tax, taking the sales tax deduction may be the right call. But if you’re a high-income earner or live in a state with high income tax, claiming that may save you more money.

Before filing your taxes consider hiring a professional or shop around for an online service that can help you file your return.

Frequently asked questions

• What are some examples of state and local income tax?

  Some common types of state and local income tax include:

  • Estimated tax payments
  • Extension tax payments
  • Foreign income tax

  • Local income tax
  • State income tax
  • Prior year state and local income taxes that you paid this year

• Is buying a car tax deductible in 2019?

  Yes. There are several tax deductions you may qualify for if you bought a new car.

  • You can write sales tax off under the sales tax deduction.
  • If it’s a plug-in electric or hybrid vehicle, you may qualify for the electric vehicle tax credit.
  • If you’re self-employed, you can write off work-related operational expenses.v

• Should I claim sales tax or income tax?

  Under most circumstances, you should claim whichever deduction is higher. But if your sales tax is almost equal to your income tax, you could save more money next tax season by taking the sales tax deduction because your state income tax refund won’t be considered taxable income on next year’s return.