Sales Tax Strategy

Today TaxMama hears from Fran from Marietta, GA asks “Are you able to take sales tax deduction on automobile purchase?”

Well Fran,

For a long while, since 1986’s Tax Reform Act, no, you couldn’t, except when you depreciate the car for business – as part of it’s total cost.

However, for the last two years, sales tax has returned. But it’s optional. And here’s how it works.

You can use either the sales tax deduction or your state income tax deduction when you itemize (use Schedule A) your deductions.

For folks who have no state income tax, the choice is obvious. But if your state does charge you income taxes, you need to make a choice. To do that, you have to understand your options.

In order to use your sales tax deduction, you look up your amount in the tables in the instructions to IRS Form 1040 Schedule A & B. The Sales Tax Tables start on page 10. (See link below.) Your deduction is based on your state, your income level and your family size. Then, if you bought a car, or something major like a boat, plane or motor-home, you can add the sales tax to the amount in the tables. (Publication 600 which used to have the Sales Tax Tables has been eliminated.)

Most ordinary folks would think that if the state income tax deduction is higher, that’s the one to use. But here’s the strategy.

If you have a state refund coming, when you use the state income tax deduction, your state refund will be taxable next year, on your IRS return up to the amount of the state income taxes you deducted.

BUT, if you use the sales tax deduction – your state refund won’t be taxable.

Understanding this will help you make the right choice – even if the sales tax deduction is a little lower.

And remember, you’ll find answers to questions about deductions and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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