Sales Tax Deductions for Income Tax

In the past, one of the most overlooked deductions for income tax was state and local tax deductions, including sales tax on certain types of purchases. If you bought a car, you could deduct the sales tax of the purchase from your federal income tax. But before you get excited, know that these income tax breaks expired on December 31 of last year and don’t apply to tax returns this year. (With only a few weeks left before tax day, treat this as a good reminder about filing your taxes.) Although we don’t focus on income tax, it does go hand in hand in many people’s minds with sales tax because of how they balance one another in most state budgets. The Pew Charitable Trust has a great article explaining how the cross between the two works.

Let’s look at one set of examples from their article. Washington, the article states, had the highest amount of sales tax deductions taken in 2011, with nearly 29% of all residents who filed income tax taking deductions for sales tax. On average, this deduction was around $604 for Washington residents. 11 million filers claimed $17 billion in state and local tax deductions in 2011 and that is a good chunk of change. Washington doesn’t have state income tax but has an average rate of 8.87% for sales tax, putting it at one of the highest sales tax rates in the country. Since sales tax revenue is one of the state’s major sources of income because there is no income tax, sales tax has to be high to pay for the operational budget.

On the other side of the coin, neighbors in nearby Oregon are subject to income tax but not sales tax. Fewer than 1% of filers claimed state and local tax deductions and the average deduction was a measly $6. These figures are for individuals, but businesses can also claim sales taxes on their income tax returns. Most sales taxes on business purchases are deductible as part of the cost of the items — you don’t have to separate them out from the price to take the deduction. Large purchases, however, can be different. If your company bought a car last year, you’ll need to check with your CPA to find out how to deduct the sales tax. It might not all be deductible in a single year. It’s all part of the complex interplay among taxes, state, and federal, income and sales, and use and excise. It’s this complexity that keeps us interested — but our job is to make it simpler for you. Contact us today to see how our software can help you keep your business’s sales tax filing simple, no matter how complex your income tax may be.

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