Sales Tax deductions
This entry was posted on 4/14/2007 12:38 AM and is filed under uncategorized.
A few years back, Congress brought back the sales tax deduction, but there are limitations. If you live in a state that has its own income tax, you can deduct the higher of your state and local income taxes, or your sales tax paid. Your sales tax paid can be figured three ways. Actual, table, or table plus major purchases. Actual is self explanatory, the table method references your Adjusted Gross Income and your exemptions claimed. Table plus major purchases, adds the table amount to your major purchases which includes, cars, trucks, boats and RVs.
We've found that most people continue to deduct their income taxes, but we practice in Minnesota, a state with an income tax. This change can be said to most help people in no income tax states like South Dakota, Florida, and Texas. This deduction applies to personal purchases generally. Businesses have always been able to deduct their sales tax paid. For instance, when supplies are purchased for a business, the whole cost including the sales tax, is written off.
Even if you do deduct your income taxes, the taxability of any state income tax refund you might get, may be effected by the sales tax table amounts. Generally, if you deduct sales tax paid instead of income taxes paid to a state, a state income tax refund is not taxable. But let's say your refund from the state is $500 and your state income taxes only exceeded your sales taxes paid by $200 in the year you deducted your state income taxes. Only $200 would be taxable, because that is the extent of your benefit from the deduction of your state income taxes. Is it any wonder that, accountants rely on their software? This interpretation, though not part of the instructions to form 1040, is on firm ground, relying on the tax benefit rule, which states that if you didn't get a benefit for deducting something, a later refund related to it, is not taxable.
