The Sales Tax Deduction and Big Ticket Items
Posted by: Brookside Admin
If you plan to itemize your tax return this year, you could be in for some significant savings over the standard deduction. That requires some careful calculations, however. Included in that is the decision to claim either the state and local income tax you paid throughout the year as a deduction, or the state and local sales tax you paid.
Most taxpayers choose to deduct income tax without a second thought. If you're in a high tax bracket, that typically will work out in your favor. In some cases, however, it's worth running the numbers to see if you could save money by choosing sales tax as a tax deduction.
You can calculate the amount of sales tax paid throughout the year two ways. First is the labor intensive version where you save every receipt and add up the sales tax on each of them. If you'd prefer not to go through that hassle, you can instead take an average sales tax amount from the IRS in the Schedule A instructions. You'll identify your state, and your income range and exemptions to find the amount you're able to deduct.
Typically, the average sales tax deduction will be close to what you'd be able to deduct if you took the time to add up the tax paid on all of your purchases. So, it's an easier path and results in a similar outcome. Since the IRS table only gives you estimated state sales tax, you're also allowed to add in any additional tax paid at the county or city level.
But, what happens if you've made a big purchase like a new car this year? That would seem to be a good reason to add up all of your individual purchases since that big ticket item might push you well beyond the average. However, in the IRS' worksheet, there's a space to enter sales tax paid on specific items. This is meant for big ticket items all manner of motor vehicles including cars, motorcycles, aircrafts, boats, off-road and recreational vehicles. It also includes houses, including mobile homes, prefabricated homes, or even substantial renovations or additions to your existing home.
In most of these cases, the sales tax paid on these big ticket items needs to be the same as the general sales tax rate. In the case of motor vehicles, even if the sales tax paid was at a lower rate, you can still deduct it, however. If the sales tax rate exceeds the general sales tax rate, you would only deduct the amount of tax you would have paid at the general rate.
There are a number of additional stipulations regarding house purchases. The general rule is that if sales tax is directly applied to the purchase of a home, or on the cost of an addition or renovation, you're able to deduct that amount. Tax paid on the purchase of building materials for your home renovation project also counts towards your deductions. That even applies if you've hired a contractor to do the work for you. The sales tax on the materials purchased by your builder can still be deducted.
One large exception that should be noted is that any of these big ticket items are only applicable to the sales tax deduction if they're purchased for personal use.
If you're in the market for a new car, new home, or other qualifying big ticket item, however, it might be a good idea to make that purchase before the end of the year so you can reap the benefits on your next tax return.
If you need help calculating which deductions benefit you the most, and ensuring your tax return is completed with accuracy, contact the experts at Brown Kinion & Company CPAs in Tulsa, Bixby, and Broken Arrow.