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Choose your state tax deduction

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in Small Business Tax,Small Business Tax Deduction Strategies

2017 might be the last year you decide between deducting personal (nonbusiness) state and local income taxes or state and local general sales taxes on your federal income tax return.

Strategy: Crunch the numbers. Then claim the deduction—income taxes or sales taxes—that provides the biggest tax savings.

For 2018-2025, the Tax Cuts and Jobs Act (TCJA) limits the overall deduction for personal state and local taxes (SALT), so this point will become moot for many taxpayers (see box).

Here’s the whole story: Generally, if you itemize your deductions for 2017, you can include an unlimited tax deduction for state and local income taxes and property taxes, especially residents of states with high tax rates like California and New York. However, if it suits your purposes, you can opt to deduct your state and local sales taxes instead of state and local income taxes.

The optional sales tax deduction is a no-brainer for residents of the seven states with no state income taxes (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming). For other taxpayers, it could be a close call.

The state and local income taxes withheld from wages are reflected on your W-2, but it’s harder to tally up the amounts spent on sales taxes in 2017. Use one of two methods.

1. Actual expense method: Examine your records to determine the amounts paid for sales taxes. You’ll likely have to peruse credit card and bank statements and receipts you’ve kept for purchases. Thus, this can be time-consuming and you might not have the necessary paperwork.

2. Simplified method: The IRS provides a table with a state-by-state breakdown. All you have to do is refer to the state where you reside and the size of your family.

In addition to this IRS table amount, you can add on sales tax for these “big-ticket items.”

  • Lease or purchase of a vehicle
  • Purchase of a boat or aircraft
  • Purchase or substantial addition or renovation to a home.

Although the actual expense method will likely produce a larger overall deduction, you may prefer the simplified method, especially if you purchased any big-ticket items in 2017.

Tip: To compare results for 2017 returns, use the IRS calculator at irs.gov/Individuals/Sales-Tax-Deduction-Calculator.

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