Deducting State and Local Taxes: How to Choose Between Income and Sales Tax

If you itemize your deductions and live in one of the 43 states with income taxes, you have the option of deducting either the state and local income taxes you paid for the year or the state and local sales taxes you paid, up to a $10,000 annual cap. You can't deduct both: You must choose between income tax and sales tax. As a general rule, you should deduct whichever is more. However, because of the annual cap, in some cases it won't make any difference which tax you choose to deduct. First, you have to figure out how much state income tax and sales tax you paid.

Determining How Much State Income Tax You Paid

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

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 $759 deduction. The same person would get a $561 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.

If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, you don't pay any income taxes and may only deduct your sales taxes if you itemize.

$10,000 Annual Cap on State and Local Tax Deduction

Before 2018, you could deduct the full amount of sales tax or state income tax you paid without any limit. However, the Tax Cuts and Jobs Act imposed a $10,000 annual limit on the state and local tax deduction for all taxpayers. For 2018 through 2025, you may deduct a maximum of $10,000 for:

• state and local property taxes
• state and local personal property taxes, and
• state and local income taxes or state or local sales taxes deducted instead of state income taxes.

Thus, for example, if you pay $10,000 or more in property tax, you'll get no deduction for your state sales tax or income tax because you'll already be over the cap. Because of the cap, depending on the amount of your sales tax deduction and how much property tax and income tax you paid, in some cases it won't make any difference whether you deduct sales tax or state income tax.

Example: Sam, a California taxpayer, paid $6,000 in property tax and $4,000 in state income tax. His sales tax deduction based on IRS tables is $5,000. It makes no difference whether he deducts his sales tax or state income tax; either way, his deduction is limited to $4,000 so his total deduction is no more than $10,000.

On the other hand, in some cases you could still benefit from deducting sales taxes instead of state income tax.

Example: Assume that Sam from the above example paid only $4,000 in property tax. He'll now benefit from deducting his $5,000 in sales taxes instead of his $4,000 in state income taxes—he'll get a total deduction of $9,000 instead of $8,000.