Can You Itemize Sales Tax on Your Tax Return?
Navigate federal tax deductions. Learn if sales tax can lower your taxable income and how to assess its benefit for your return.
When preparing a federal income tax return, taxpayers generally have a choice between taking the standard deduction or itemizing their deductions. The standard deduction is a fixed dollar amount that reduces taxable income, while itemized deductions are a collection of eligible expenses that can also lower taxable income. For some individuals, itemizing deductions, including state and local sales tax, can result in a greater tax benefit.
Itemizing Deductions
The fundamental difference between the standard deduction and itemized deductions lies in their composition. The standard deduction is a predetermined amount that varies by filing status and is adjusted annually. Itemized deductions are specific allowable expenses that taxpayers can claim, such as mortgage interest, charitable contributions, and certain medical expenses. Choosing to itemize requires totaling eligible expenses and comparing that sum to the standard deduction amount to determine which option provides the larger reduction in taxable income.
Sales Tax or Income Tax Deduction
Taxpayers face a specific choice when deducting state and local taxes: they can deduct either state and local income taxes or state and local general sales taxes, but not both. This decision is part of the broader State and Local Tax (SALT) deduction, which also includes property taxes. Individuals residing in states without an income tax often find deducting sales tax more advantageous.
The decision also depends on whether a taxpayer made substantial purchases during the year. Large expenditures, such as a new vehicle, boat, aircraft, or materials for home construction or major renovation, can generate a considerable amount of sales tax, making the sales tax deduction more appealing. The total amount of state and local taxes that can be deducted, including property taxes plus either income or sales taxes, is capped. For tax years 2025 through 2029, the cap on the SALT deduction has been temporarily increased to $40,000 ($20,000 for married individuals filing separately).
Determining Your Sales Tax Deduction
When deducting sales tax, taxpayers have two primary methods for calculating the amount: deducting actual expenses or using the Internal Revenue Service (IRS) sales tax tables. The actual expenses method requires meticulous record-keeping of all sales tax paid throughout the year. This involves saving receipts and other documentation that clearly show the sales tax amount for each purchase.
Sales tax paid on general everyday items can be included, as can sales tax on larger purchases like motor vehicles, recreational vehicles, or home building materials, even if the tax rate differed from the general sales tax rate. However, sales tax paid on business expenses, items purchased for resale, federal income taxes, Social Security taxes, or property taxes cannot be included in this specific deduction. If you choose this method, maintaining comprehensive records is crucial for substantiating the deduction if your return is reviewed.
Alternatively, the IRS provides sales tax tables that offer a simpler method for calculating the deduction. These tables are based on adjusted gross income, family size, and the state of residence. Taxpayers using the tables can still add the actual sales tax paid on certain large purchases, such as vehicles, boats, and materials for home construction or major renovation, to the table amount. This combined approach can provide a higher deduction for those who made significant purchases but do not have detailed records for all other sales tax paid.
Claiming the Deduction
Once the sales tax deduction amount is determined, it is reported on Schedule A (Form 1040), Itemized Deductions. Specifically, taxpayers will indicate their choice to deduct state and local general sales taxes instead of income taxes by checking the appropriate box on line 5a of Schedule A. The calculated sales tax amount is then entered on the designated line. Schedule A is then attached to Form 1040 when filing the tax return.
It remains important to retain all records and documentation used to calculate the sales tax deduction for a period of at least three years from the date the return was filed. This record-keeping is necessary to support the claimed deduction in case the IRS requires further verification. Even if the records are not submitted with the tax return, they serve as crucial evidence for audit purposes.