Contributed by: WrenD, FreeTaxUSA Agent, Tax Pro
Big purchases like cars, boats, or RVs can be super exciting, but did you know they might also come with some cool tax benefits? Imagine turning that big buy into a smart money move by deducting the state sales tax on your federal tax return. This article will show you how to take advantage of this deduction, compare it with state income tax deductions, and highlight states where no income tax can make your sales tax savings even bigger.
What is state sales tax?
State sales tax is the extra money you pay when you buy something. For example, if your state has a 5% sales tax and you buy a $10,000 car, you’ll pay $500 in sales tax. This tax helps pay for things like schools, roads, and public services in your state.
Where can I deduct sales tax?
To deduct state sales tax, you need to itemize your deductions. Itemizing means listing out certain expenses on your tax return instead of taking the standard deduction (a flat amount set by the IRS).
If your itemized deductions, including your sales tax, don’t add up to more than the standard deduction, it’s usually better to take the standard deduction.
Can I deduct sales tax and state income tax?
When you use itemized deductions, you can choose to deduct either your state sales tax or your state income tax. You can’t do both, so you must pick one. Generally, state income tax is larger than sales tax. However, choosing to deduct sales tax might be a better deal if:
- You live in a state with no income tax.
- You made large purchases during the year, like a vehicle, boat, or RV.
- Your sales tax payments were higher than your state income tax payments.
Which states have no income tax?
If you live in one of these states, you don’t pay state income tax:
- Alaska
- Florida
- Nevada
- New Hampshire (does tax interest and dividend income)
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
For people in these states, deducting sales tax is often the best choice since there is no state income tax to deduct.
How do I know how much sales tax to deduct?
To deduct state sales tax, you'll need to either:
- Keep All Receipts: Save all your receipts from every purchase you make.
- Use IRS Calculator: The IRS provides a calculator to help you estimate how much sales tax you paid based on your income and where you live. You can use this if you didn’t keep receipts for smaller purchases. You should still save receipts for large (out of the norm) purchases.
Where do I enter sales tax in FreeTaxUSA?
You will enter your sales tax paid by following this menu path: Deductions/Credits > Itemized Deductions > Taxes Paid.
Once you have entered the sales tax amount, select Save and Continue. If you have state and/or local withholdings (automatically filled in by the software), the next screen will ask you to confirm if you’d like to deduct sales tax or income tax.
Conclusion
Deducting state sales tax on your federal tax return could save you money, especially if you made large purchases or live in a state with no income tax. Remember, you must itemize your deductions for this to work, and your total itemized deductions should be more than the standard deduction to get the most benefit. Keep your receipts and use the IRS calculator to help you calculate your deduction. Happy saving!
For detailed information about the sales tax deduction see the “Taxes You Paid” section of the IRS Instructions for Schedule A.
For more information about itemizing deductions, see our article on itemizing.
