| Sales Tax Deduction |
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The American Jobs Creation Act (AJCA) of 2004 allows individuals to either deduct state and local sales tax, or state and local income tax as an itemized deduction on line 5 of federal Schedule A. When the ACJA was passed in 2004, Oregon was not tied to the federal law so the deduction for state and local sales tax was not allowed under Oregon law. An individual's 2004 Oregon itemized deductions were reduced by any sales tax deduction claimed on Schedule A.
The 2005 Oregon Legislature passed Senate Bill 31 which took effect on November 4, 2005. It retroactively tied to the federal AJCA of 2004. In addition, the Oregon Legislature created a provision that does not allow the sales tax deduction. That provision does not begin until tax year 2005.
This means that on or after November 4th, the deduction for state and local sales taxes is an allowable deduction under Oregon law for tax year 2004 only. Individuals who claim sales tax as an itemized deduction on their federal return in 2005 and later must reduce their itemized deductions on the Oregon return for the sales tax deduction claimed.
Tax Year 2004
If you filed your 2004 Oregon return and elected to claim the sales tax deduction instead of state and local income taxes and it was adjusted when we processed your return, you may file an amended return. If you did not claim the sales tax deduction on your 2004 Oregon return and did not deduct state and local income taxes, you may amend your return to claim the sales tax now. Contact us toll-free within Oregon at 1-800-356-4222 or in Salem at 503-378-4988 for more information, or download the forms from www.oregon.gov/DOR.
Tax Years 2005 and 2006
For tax years 2005 and 2006, you may not claim state or local sales tax on your Oregon return. You must make the same election on your Oregon return as you did on your federal return. If you itemize deductions and claim the sales tax deduction, reduce your itemized deductions as follows:
- 2005 and 2006 Full-year Oregon residents will enter the deduction amount on Form 40, line 24.
- 2005 and 2006 Nonresidents will enter the deduction amount on Form 40N, line 42.
- 2005 Part-year Oregon residents will enter the deduction amount on Form 40P, line 43, 2006 Form 40P, line 42.
Individuals who reduce their total federal itemized deductions because of income limits will need to complete a worksheet to determine the amount to subtract from their Oregon itemized deductions. The worksheet is available in the publication Itemized Deductions Limit, which you may download from www.oregon.gov/DOR.
Example 1: Ron and Mary are Oregon residents and file a joint 2005 Oregon Form 40. As an itemized deduction, they claim $3,500 of Washington sales taxes paid on the purchase of a boat they keep at their Washington lake house. They claim total itemized deductions of $14,500, and they are not subject to itemized deduction limits. Ron and Mary must enter $3,500 on line 24 of their Oregon Form 40. Their net Oregon itemized deductions are $11,000 ($14,500 – $3,500).
Example 2: John and Karen are Washington residents and file a joint 2005 Oregon Form 40N. They claim total itemized deductions of $21,500 ($6,000 of Washington state sales taxes and $15,500 of home mortgage interest). Their federal AGI is $165,000. Their total itemized deductions are limited to $20,831 based on the 2005 federal itemized deductions worksheet. John and Karen complete the worksheet from the Oregon publication, Itemized Deductions Limit, to calculate how much they can subtract from their Oregon itemized deductions. They calculate a subtraction of $5,814, which they must enter on line 42 of their Oregon Form 40N ($6,000 x .969 = $5,814). Their net Oregon itemized deductions are $15,017 ($20,831 – $5,814).
Example 3: Jeremy is a Washington resident and files a single 2006 Oregon Form 40N. He claims total itemized deductions of $23,000 ($10,500 of Washington state sales taxes and $12,500 of home mortgage interest). His federal AGI is $245,000. His total itemized deductions are limited to $21,110 based on the 2006 federal itemized deductions worksheet. Jeremy completes the worksheet from the Oregon publication, Itemized Deductions Limit, to calculate how much he can subtract from his Oregon itemized deductions. He calculates a subtraction of $9,639, which he must enter on line 42 of his Oregon Form 40N ($10,500 x .918 = $9,639). His net Oregon itemized deductions are $11,471 ($21,110 – $9,639).
Revised January 2007
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