Write Off your Sales Tax!

Write Off your Sales Tax!

by Amanda Howe, December 2009

Who knew that last year's corporate tax cut would give any relief to the little guy? It's true. Lawmakers decided to allow taxpayers to deduct state and local sales tax. This tax break actually cost federal reserves $5 billion. But the bill's supporters considered it a worthwhile investment. The break won votes of support from representatives from states with no state income tax.

Current tax law allows for the deduction of state income tax on federal returns. But seven states - Washington, Nevada, Texas, Florida, South Dakota, Wyoming and Tennessee - do not have personal income tax. The deduction primarily benefits people in these states. After all, a taxpayer who paid more in sales taxes than state income taxes can claim a larger deduction. There's no double dipping though. Taxpayers can't deductions for both state income tax and state sales tax.

If you reside in one of the seven above-mentioned states, the deduction would work like this. For a Texas family of four with an income between $30,000-$40,000, the sales tax deduction would be $730. Additional deductions could include local sales tax and sales tax paid on large purchases like a boat, a car, a home or home building materials.

The bad news is this provision only covers 2004 and 2005 tax returns. But a group of lawmakers headed by Rep. Kevin Brady are working to permanently extend the tax break. Their bill is called the Permanent Sales Tax Deduction Act of 2005. Brady has vowed to make the bill's passage a top priority. But he has a tough job thanks to deficit hawks hinting at a possible veto threat.

For more information visit the IRS at http://www.irs.gov/pub/irs-pdf/p600.pdf