Can You Use Sales Tax as a Deduction on Your Tax Return?

Taxes can be a significant expense, so finding legal ways to reduce your bill is worth exploring. One often-overlooked deduction is the ability to deduct sales tax on a federal tax return. This option is particularly useful for those in states without an income tax or who made large purchases during the year.

Before claiming this deduction, it’s important to understand when it applies, how to calculate it, and what records to keep. Proper reporting ensures compliance with IRS rules.

When Deductions Are Allowed

The IRS allows taxpayers to deduct either state and local income taxes or state and local sales taxes, but not both. This deduction is especially useful for residents of states without an income tax, such as Florida, Texas, and Washington.

Only those who itemize deductions on Schedule A of Form 1040 can claim the sales tax deduction. Taxpayers who take the standard deduction—$14,600 for single filers and $29,200 for married couples filing jointly in 2024—cannot use this option. Itemizing is only beneficial when total deductions exceed the standard deduction amount.

The deduction applies to general sales taxes on personal purchases but excludes certain transactions. Sales tax on real estate, business expenses, and items for resale does not qualify. However, sales tax on a personal vehicle can be included unless the vehicle is used for business purposes, in which case it may need to be deducted as a business expense.

Choosing Between Income Tax Deduction or Sales Tax Deduction

Taxpayers must decide whether to deduct state and local income taxes or sales taxes based on which provides the greater benefit. Those with high taxable income often find the income tax deduction more advantageous, particularly in states with high tax rates like California or New York. Conversely, individuals who made significant taxable purchases—such as a car, home renovations, or major appliances—may benefit more from deducting sales tax.

For residents of states without an income tax, sales tax is the only option. However, even in states with an income tax, the sales tax deduction can be beneficial in years of high spending. Someone who buys a $50,000 car and spends $20,000 on home furnishings, for example, may end up with a larger deduction than they would by deducting state income tax. The IRS provides estimated sales tax deductions based on income and household size, but taxpayers can add tax paid on major purchases to this amount, potentially increasing their deduction.

How to Calculate the Deduction

Taxpayers can determine their deductible sales tax using either the IRS’s optional sales tax tables or by tracking actual sales tax paid throughout the year. The IRS tables estimate deduction amounts based on income, household size, and state of residence, offering a simplified approach for those who prefer not to keep detailed records. However, these tables may not fully account for tax paid on large, one-time purchases.

Those who track actual sales tax must exclude taxes on non-qualifying expenses, such as groceries in states where they are tax-exempt or business-related purchases. The IRS allows taxpayers to add sales tax from major purchases—such as cars, boats, and home improvements—to the table amount. To determine the total deductible amount, taxpayers should compare their actual sales tax paid to the IRS table estimate and use the higher figure.

Recordkeeping Essentials

Keeping thorough records is essential to substantiate a sales tax deduction in case of an IRS audit. Without proper documentation, the deduction could be disallowed, leading to additional tax liability, interest, and penalties for negligence or substantial understatement of income tax.

Taxpayers should retain all receipts that clearly show the amount of sales tax paid, as well as supporting documents for major purchases, such as vehicle registration forms or contractor invoices. Digital copies are acceptable as long as they are legible and securely stored.

For those using the IRS sales tax tables, maintaining records of income sources and household size ensures the correct deduction amount is claimed. Taxpayers who add tax from large purchases to the table estimate must keep itemized documentation proving the additional amounts. Financial software and expense tracking apps can help categorize expenditures and generate reports summarizing annual sales tax paid.

Reporting It on a Tax Return

Once the total deductible sales tax amount is determined, it must be reported on Schedule A of Form 1040. Since this deduction is only available to those who itemize, it is entered under the section for state and local taxes. Taxpayers must choose between deducting income tax or sales tax, ensuring that only one is claimed.

If using the IRS sales tax tables, the amount from the appropriate chart is recorded, along with any additional tax paid on major purchases. The total is then combined with other deductible taxes, such as property tax, before being transferred to the main tax return.

The IRS may request documentation to verify the deduction, particularly if the reported amount is unusually high. Taxpayers should be prepared to provide receipts, invoices, or other proof of sales tax paid. Electronic filing software often includes prompts to guide users through the process, ensuring accurate reporting. Those working with a tax professional should provide all relevant records to maximize the deduction while maintaining compliance with IRS regulations.