When you itemize your deductions, you can deduct either state and local income taxes or general state and local sales taxes on your 2016 tax return. But you can’t have it both ways — it’s one or the other.
Typically, you might write off your state and local income taxes. This includes amounts withheld from your paychecks and estimated taxes paid during the year such as quarterly installments for self-employed individuals. If you live in a high-tax state like California or New York, this deduction is often one of the biggest — if not the biggest — on your return.
However, there’s an alternative that might appeal to some taxpayers. In lieu of state and local income taxes, you can deduct the sales taxes you’ve paid this year. This option is especially attractive to taxpayers residing in the handful of states that don’t impose any state income tax.
This alternate deduction for state sales taxes has expired and been reinstated several times in the past. Finally, the Protecting Americans from Tax Hikes (PATH) Act in 2015 made this option a permanent part of the tax code.
If you itemize your deductions, there are two ways to deduct sales taxes:
- Option 1: Claim the actual amount of sales tax paid during the year. This requires you to keep receipts or other documentation of purchases.
- Option 2: Use the state-by-state table provided by the IRS. The deduction is based on your state, your income and the number of exemptions on your tax return.
Often, the table amount is lower, but more convenient. But, you can add to this sales tax table calculation by amounts paid for the lease or purchase of a vehicle; the purchase of a boat or aircraft; and the purchase of substantial home additions or renovations. In some cases, the extra tax for these “big-ticket items” may push you to use this as an alternative to the state income tax deduction.
Give Carl Heinemann, your Chattanooga CPA, a call. We can help you make sure you have all the information needed to make the optimal choice on your 2016 tax return.