Deducting State and Local Taxes: How to Choose Between Income and Sales Tax
Here's some help on how to choose whether to deduct the state and local income taxes you paid for the year or the state and local sales taxes you paid.
If you itemize your deductions, you have the option of deducting either the total amount of state and local income taxes you paid for the year or the state and local sales taxes you paid. You can't deduct both: You must choose between income tax and sales tax. Obviously, you should deduct whichever is more. But how do you know which one to choose?
If you're an employee, it's easy to know how much state and local income tax you paid during the tax year--the amount of state and local tax withheld will be shown on the Form W-2 provided by your employer. If you made mandatory contributions to the California, New Jersey, or New York Nonoccupational Disability Benefit Funds, Rhode Island Temporary Disability Benefit Fund, or Washington State Supplemental Workmen's Compensation Fund, the amount is added to your state income taxes. The same goes for mandatory contributions to the Alaska, California, New Jersey, or Pennsylvania state unemployment funds; and mandatory contributions to state family leave programs, such as the New Jersey Family Leave Insurance program, and the California Paid Family Leave program. Car inspection fees, assessments for sidewalks or other improvements to your property, tax you paid for someone else, and license fees (marriage, driver's, dog, and so on) are not included.
Determining how much sales tax you paid during the year is another matter. One way is to keep receipts for all the sales taxed purchases you made during the year and add up the total amount of sales tax you paid. (You can't include taxes on gasoline.) You need to be a fanatical record keeper to go this route.
Since figuring out how much you actually paid in sales tax is likely impossible, the IRS has estimated how much sales tax people at various income levels pay on average in each state based on that state's sales tax rates. Its results are contained in the sales tax tables in the instructions to IRS Schedule A. Thus, for example, a single taxpayer in California with an income of $50,001 would get a $742 deduction. The same person would get a $482 deduction if he or she lived in Massachusetts.
But you may be thinking "Wait a minute, some years I pay way more than the average sales tax." This would likely be true, for example, in a year you purchased a car, motor home, or boat. Luckily, the IRS has thought of this. You are allowed to add the actual sales tax you pay for:
- the purchase of a motor vehicle (including a car, motorcycle, motor home, recreational vehicle, sport utility vehicle, truck, van, and off-road vehicle)
- a leased motor vehicle
- an aircraft or boat, if the tax rate was the same as the general sales tax rate, or
- a home (including a mobile home or prefabricated home) or substantial addition to or major renovation of a home, but only if the tax rate was the same as the general sales tax rate).
Note that the "general sales tax rate" is the sales tax charged throughout your state, and doesn't include any additional sales taxes imposed by your local government (county or city), or any additional sales tax charged on purchases of particular types of products or services. Some states charge a lower sales tax on purchases of food, clothing, medical supplies, and motor vehicles. However, the IRS allows you to deduct these purchases at the higher general sales tax rate.
To make things as easy as possible for you, the IRS has created an online sales tax deduction calculator you can use instead of its printed tables and worksheet.
The sales tax deduction primarily benefits taxpayers with a state or local sales tax but no income tax. This includes Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Taxpayers who live in the other states are usually better off deducting their state and local income taxes.