Money Magazine
    SAVE   |   EMAIL   |   PRINT   |   RSS  
A new dilemma: Sales vs. state taxes
For the first time in years, you can choose which to deduct.
March 11, 2005: 11:07 AM EST
By Amy Feldman, MONEY Magazine

NEW YORK (MONEY Magazine) - Starting this year -- and for 2004 and 2005 only, under current law -- you can deduct either your state and local income taxes or sales taxes on your federal return as long as you itemize (and don't fall prey to the AMT).

For those who live in states that levy sales taxes but not income taxes, such as Florida, Nevada and Texas, this is a huge boon. If you've been taking the standard deduction, this may be reason enough to itemize.

What's tricky.

For residents of states with an income tax, the decision comes down to which deduction is bigger.

Fortunately, while you can use actual sales receipts to determine your write-off, you don't have to. The IRS has calculated how much you can deduct based on where you live, your income and your exemptions.

Simply look it up in Publication 600, available at www.irs.gov, or use tax software. If you bought a car, boat, motorcycle or plane last year, you can in most cases add the taxes on that big-ticket item to the IRS number.

How it works.

Consider a married couple with two kids who live in Baton Rouge and earn $80,000. Their state and local income tax would be $2,608, according to Justin Ransome, a senior manager in KPMG's private-client advisory services practice, while their state and local sales tax deduction would be just $1,288. But if they bought a car for $30,000, their sales tax would increase by $2,523, pushing the deduction to $3,811.

Tax planning tip.

If your sales tax deduction is just below your income tax deduction, consider bunching major purchases into this year. Then take the state sales tax deduction in 2005 and the income tax write-off in 2006.

One family saves with sales taxes.

Since former pilot Bo Baker, 67, retired, he and his wife Judy, 63, have kept three homes -- in Marco Island, Fla., South Portland, Maine and Mesa, Ariz. -- but have filed as Florida residents.

That's meant no state income taxes, but no hefty deduction on their federal return either. So the couple will save money under the new tax law -- after they do a little math.

The Bakers must divvy up the sales tax deductions based on the number of days they live in each state. IRS tables show that, with an income of $93,000 and two exemptions, the couple can deduct $1,018 in Florida, $859 in Arizona or $749 in Maine; if split equally three ways, that's an $875 write-off.  Top of page


graphic


YOUR E-MAIL ALERTS
Taxation
Sales and Marketing
Florida
Internal Revenue Service (IRS)
Manage alerts | What is this?