What Is the Sales Tax Deduction & How Does It Work?

The sales tax deduction allows taxpayers to reduce their federal taxable income by the amount of state and local general sales taxes paid. It is one of several deductions available to taxpayers who itemize their deductions rather than taking the standard deduction.

Eligibility for the Sales Tax Deduction

To claim the sales tax deduction, taxpayers must itemize their deductions on Schedule A (Form 1040) of their federal income tax return. Itemizing means listing specific eligible expenses. This is an alternative to the standard deduction, a fixed amount that varies by filing status.

Taxpayers choose between itemizing and taking the standard deduction based on which method results in a larger reduction of their taxable income. If the total of eligible itemized deductions, including sales tax, exceeds the applicable standard deduction, itemizing provides a greater tax benefit. The sales tax deduction falls under state and local taxes (SALT) on Schedule A.

The Choice: Sales Tax or Income Tax

Taxpayers must choose whether to deduct state and local general sales taxes or state and local income taxes. The IRS stipulates that taxpayers cannot deduct both; they must choose one annually when preparing their federal income tax return.

The most beneficial choice depends on the state’s tax structure. For instance, individuals in states without a state income tax may find the sales tax deduction more advantageous. Conversely, taxpayers in states with high income tax rates benefit more from deducting state and local income taxes.

Taxpayers should compare the total sales tax paid against the total state and local income tax paid to determine which option yields the greater deduction. This comparison helps maximize tax savings. The decision should be based on a careful assessment of personal financial circumstances and state tax obligations.

Calculating Your Sales Tax Deduction

Taxpayers have two primary methods for calculating the sales tax they can deduct: tracking actual sales tax paid or using the IRS sales tax tables. Each method requires different levels of record-keeping, and the choice depends on the taxpayer’s ability to maintain detailed records.

The first method involves deducting the actual state and local general sales taxes paid during the tax year. This approach requires detailed record-keeping, including saving receipts. Only general sales taxes qualify; specific excise taxes, like those on fuel or tobacco, do not. Sales tax paid on certain large purchases, such as motor vehicles, boats, or materials for home construction or renovation, can be added to the total actual sales tax deducted.

Alternatively, taxpayers can use the IRS sales tax tables, which provide a standardized deduction. These tables are available from the IRS. The deductible amount is estimated based on the taxpayer’s state of residence, adjusted gross income, and the number of exemptions. Even when using the IRS tables, taxpayers can add the actual sales tax paid on certain significant purchases, such as a new car or boat, to the table amount.

Important Considerations for the Deduction

Taxpayers must consider limitations that apply to state and local tax deductions. The primary limitation is the State and Local Tax (SALT) deduction cap. For most filers, the total state and local income, sales, and property taxes that can be deducted is limited to $10,000.

For married individuals who file separately, this limit is $5,000. This cap applies to the combined total of all state and local taxes deducted, not just sales tax. Even if the calculated sales tax deduction is higher, the total state and local tax deduction cannot exceed this $10,000 (or $5,000) limit. Sales tax paid on large purchases, while added to the total, remains subject to this cap.