Sales Tax Deduction: FAQ
It is important to me that Washingtonians are treated fairly at tax time. Every year I work hard to ensure Washingtonians can deduct their state and local sales taxes, and I will continue fighting for this deduction until we succeed in making it permanent.
Taxpayers in states with an income tax are entitled to a federal deduction for the state income taxes they pay. This deduction prevents the double taxation of funds that have already been collected by the state to finance state services. Washington state has no income tax and finances its operations through a substantial sales tax. Unless the sales tax is made deductable, taxpayers in Washington and other states without an income tax bear a disproportionate share of the federal tax burden. From 1986 until 2004, this was the case for Washington.
In 2004, I worked with a bipartisan group of lawmakers to temporarily restored the deduction for state and local sales taxes, thus restoring fairness in the federal income tax system. Every year since then we have worked to ensure this deduction remains intact. The deduction was extended for tax years 2008 and 2009 by the Emergency Economic Stabilization Act of 2008. On March 10, 2010, my provision to extend the state and local sales tax deduction once again passed the Senate. When enacted, this extension will make it possible for Washingtonians to take this deduction on their 2010 federal income tax forms. Taxpayers in six other states with no state income tax also benefit from this deduction: Alaska, Florida, Nevada, South Dakota, Texas, and Wyoming.
There is no reason why this sales tax deduction issue needs to be an annual legislative battle. We should make it permanent. The deduction helps our state’s working families and our region’s economy; it refunds money to Washington residents, creates jobs, and stimulates economic growth by keeping money in the state.
In 2007, the most recent year of published IRS data, more than 975,000 Washingtonians took advantage of the deduction, reducing their taxable income by $2.3 billion. That translated into nearly $500 million staying in the Washington state economy instead of going to the U.S. Treasury in tax payments. I hope even more Washingtonians – including you and your family – can take advantage of the deduction this tax season. If you itemize your deductions and take the sales tax deduction, you can expect to save an average of $500. I know in this tough economy every bit helps. Below I’ve included some information from the IRS that may be helpful in getting started.
Best,
Sales Tax Deduction
If you file a Form 1040, and itemize deductions on Schedule A, you have the option of claiming either state and local income taxes or state and local sales taxes. (You can’t claim both.) Taxpayers indicate by a checkbox on line 5 of Schedule A which type of tax they’re claiming. If you saved your receipts throughout the year, you can add up the total amount of sales taxes you actually paid and claim that amount.
If you didn’t save all your receipts, you can still choose to claim state and local sales taxes. You could fill out the worksheet and use the optional general sales tax tables in the Instructions for Schedule A (Form 1040), pages A-12 through A-14. To complete your state and local sales tax deduction using the tables, complete the worksheet on page A-4. Or you can use the Sales Tax Deduction Calculator available at the IRS’s website.
Frequently Asked Questions About the New State Sales Tax Deduction
Q: Who is eligible for the tax cut?
A: Anyone who itemizes. Anyone can itemize, and therefore become eligible for the deduction. If taxpayers are intimidated about itemizing, they can call the IRS hotline for help: 1-800-829-1040 (that's 1-800-TAX-1040). However many people are better off taking the standard deduction.
Q: How will the tax cut work?
A: If you itemize, your state and local sales taxes will be deductible from your federal income tax return. You have two options to determine how much you can deduct: you can either use an IRS estimate of how much state and local sales taxes you paid, or you can use actual receipts.
Q: Do I need to save all of my sales tax receipts?
A: No. If you don't have your receipts, the IRS will estimate how much in sales taxes you paid. However, if you make large purchases you may be better off if you do save and itemize your receipts (see below). The easiest way to figure the amount of deduction you could claim is to use the IRS Sales Tax Deduction Calculator, found here.
Q: Why would I use a deduction table instead of actual sales receipts?
A: Unless you have made large purchases with high sales tax payments such as an automobile, home remodeling, jewelry, or a boat, it may be easier to use the IRS estimate instead of keeping all of your shopping receipts.
Q: How will the deduction tables work?
A: The law requires that the easy-to-use deduction tables be "based on the average consumption by taxpayers on a State-by-State basis...taking into account filing status, number of dependents, adjusted gross income, and rates of State and local general sales taxation." This means you can deduct estimates based on the IRS tables even if you don't save receipts all year.
Q: When will the tables be available?
A: To take advantage of the state sales tax deduction, Washington tax filers should obtain IRS Schedule A (Form 1040), available here.
Q: What are some examples of large purchases whose sales tax are deductible?
A: Cars, boats, jewelry, and home remodeling expense are all costly items with state and local sales taxes that are now deductible under the law.
Also, if a person leased a car before 2009, but was still paying sales taxes on his or her lease payments in 2009, those sales taxes are deductible.
Q: What if I only have receipts for a few big ticket items?
A: You can add the sales tax paid on these items to the standard sales tax deduction found in the IRS-supplied tables on pages A12 through A14.
Q: Can I deduct items like luxury tax or excise taxes on the sale of homes?
A: Generally, only taxes paid at the general state and local sales tax rate are deductible.