If you itemize deductions on your U.S. federal income tax return, you can take a deduction for either state and local sales taxes or state and local income taxes. If you choose to deduct sales taxes, you can use your actual expenses or the sales tax tables. If you use the tables, you can add the sales tax you paid on the purchase of motor vehicles. You can also deduct real estate taxes, certain personal property taxes, and if you pay any foreign income taxes, you may be able to take a deduction or a credit.
State and Local General Sales Taxes
You can elect to deduct state and local general sales taxes instead of taking a deduction for state and local income taxes. (You cannot deduct both.) This sales tax deduction is especially beneficial to taxpayers who live in states without a state income tax law. In states where there is a state income tax, you should calculate your itemized deduction for taxes both ways, to see which gives you the greater deduction. If you choose to deduct sales taxes, you can deduct your actual sales tax expenses or use the Optional State Sales Tax Tables.
Actual Sales Taxes Paid
You can deduct the actual state and local general sales taxes you paid, including compensating use taxes, plus selective sales taxes. You cannot take an itemized deduction for sales tax paid on items used in your trade or business. (You may be able to deduct sales tax on business items as a business expense, or the sales tax may have to be capitalized as part of the cost of an asset.)
Selective sales tax on food, clothing, medical supplies, or motor vehicles can be deducted even if the rate is less than the general sales tax rate. But if the selective sales tax rate on motor vehicles is higher than the general rate, you can deduct the tax only up to the amount of the general sales tax rate. Motor vehicles for this purpose include cars, trucks, vans, motorcycles, recreational and off-road vehicles, sport utility vehicles, and motor homes. If you lease a vehicle, you can also deduct the applicable sales tax.
Optional State Sales Tax Tables
The Optional State Sales Tax Tables are available in Internal Revenue Service (IRS) Publication 600. In order to use the tables, you will need to know the number of exemptions you are claiming on your tax return, and your available income. This is defined as your adjusted gross income, plus any nontaxable items, such as:
Tax-exempt interest
Veteran’s benefits
Nontaxable combat pay
Workers’ compensation
Nontaxable part of social security or railroad retirement benefits
Nontaxable part of IRA, pension, or annuity distribution
So in effect, you are able to deduct sales tax on a higher income amount (your available income) than that on which you are paying federal income tax.
Sales Tax that can be Added to the Amount in the Table
In addition to your corresponding state sales tax amount from the tables, you may also be able to deduct local general sales taxes, if applicable in your locality, and state and local general sales tax on the following specified items:
Motor vehicles, including a leased vehicle, up to the amount that would have been imposed at the general sales tax rate, if the actual tax rate on motor vehicles is higher.
An aircraft, boat, home (including mobile and prefabricated), and building materials, provided the tax was at the general sales tax rate.
There is a worksheet in IRS Publication 600 that guides you through the calculation.
If you lived in more than one state during the tax year, you will need to prorate your deduction based on the number of days you lived in each state. If you are a resident of Alaska, you will have to use actual sales taxes paid as your deductible amount.
If you are married filing separately, both spouses elect to deduct state and local sales taxes (instead of state and local income taxes), and one spouse decides to use the Optional State Sales Tax Tables, the other spouse must also use the tables.