Is State Sales Tax Deductible? How the Deduction Works

The federal tax system offers various deductions that can help reduce your taxable income. Among these deductions, certain state and local taxes, including sales tax, can be claimed on your federal income tax return. This particular deduction falls under the umbrella of state and local taxes (SALT).

Understanding Itemized Deductions

Taxpayers typically have two primary methods for reducing their taxable income: taking the standard deduction or itemizing deductions. The standard deduction is a fixed dollar amount set by the IRS, which varies based on your filing status and other factors, such as age or blindness. For the 2024 tax year, the standard deduction is $14,600 for single filers and married individuals filing separately, $21,900 for heads of household, and $29,200 for married couples filing jointly. Most taxpayers opt for the standard deduction due to its simplicity and often larger benefit.

Itemized deductions allow taxpayers to list and deduct specific eligible expenses. These deductions are reported on Schedule A. You would choose to itemize if your total qualifying expenses exceed the standard deduction amount for your filing status. Common itemized deductions include certain medical expenses, home mortgage interest, charitable contributions, and state and local taxes. The state sales tax deduction is only available to those who choose to itemize their deductions.

Electing Between Sales Tax and Income Tax

When itemizing, taxpayers generally face a choice between deducting state and local income taxes or state and local general sales taxes. You cannot claim both types of taxes in the same tax year; you must select one. This decision is often influenced by where you live and your spending habits. For instance, individuals residing in states without a state income tax may find the sales tax deduction more advantageous.

The State and Local Tax (SALT) deduction is subject to a limitation. For tax years 2018 through 2024, the maximum amount you can deduct for state and local taxes, including property taxes and either income or sales taxes, is $10,000. This cap applies per tax return, meaning married couples filing jointly are also subject to the $10,000 limit. However, a married individual filing separately typically has a $5,000 limit, provided both spouses choose to itemize and use the same deduction method.

The $10,000 cap impacts the decision between deducting income tax or sales tax. If your combined state and local income taxes and property taxes already reach or exceed this limit, there is no additional benefit from deducting sales tax. However, if your state and local income tax burden is relatively low, or if you made substantial purchases during the year, deducting sales tax could offer a larger deduction up to the $10,000 cap. Beginning with the 2025 tax year, the SALT deduction cap is temporarily increased to $40,000, with a gradual phase-out for higher-income taxpayers. This change could make itemizing more appealing for some, particularly homeowners.

Calculating Your Sales Tax Deduction

There are two primary methods for calculating the amount of state and local sales tax you can deduct on your federal return. The first method involves tracking your actual sales tax paid throughout the year. This requires meticulous record-keeping, such as retaining receipts, invoices, and credit card statements that clearly show the sales tax paid on purchases. While comprehensive, this method can be time-consuming and challenging to maintain for every transaction.

The second, and often more practical, method involves using the IRS sales tax tables. The IRS provides these tables, which estimate your deductible sales tax based on your adjusted gross income, the number of exemptions you claim, and your state of residence. These tables are designed to approximate the average sales tax paid by residents in various locations. You can find these tables in the instructions for Schedule A or use the IRS Sales Tax Deduction Calculator.

An advantage of using the IRS sales tax tables is that you can add the actual sales tax paid on certain large purchases to the table amount, even if you did not keep receipts for all other purchases. Qualifying large purchases typically include motor vehicles (cars, trucks, RVs, motorcycles), boats, aircraft, and sometimes building materials for a new home or a substantial home renovation. For these items, you can deduct the actual sales tax paid, up to the general sales tax rate in your area. Sales taxes on food, clothing, and medical supplies are deductible as general sales tax even if taxed at a reduced rate.

Record Keeping and Understanding Limitations

Maintaining accurate and thorough records is important when claiming the sales tax deduction, especially if you opt for the actual sales tax paid method. You should keep receipts, invoices, and financial statements that substantiate all claimed sales tax expenses. This documentation helps verify your deduction in case of an IRS inquiry or audit.

Generally, the IRS recommends keeping tax records for at least three years from the date you filed your original return. For certain situations, the retention period may extend to six years. It is advisable to consult IRS guidance or a tax professional for specific record retention requirements.

Not all sales taxes are deductible. For instance, sales tax paid on items purchased for a business are typically deducted as a business expense rather than on Schedule A. Similarly, sales tax on items bought for resale or on items used to generate tax-exempt income are not deductible. Sales taxes on services are generally not deductible unless they are part of a general sales tax.