State Tax Deduction

Answer 1

It’s that time of year again. You should start seeing stuff in your mail with weird alphanumeric titles like W2 or 1099-INT. That can only mean that tax time is upon us once more. Sometimes people forget certain deductions to which they are entitled. I think that it’s irresponsible to leave money on the table when it comes to settling up with Uncle Sam. If the Federal government allows a deduction that you can legally take, I think you should take it.

One deduction that often goes unclaimed is state taxes. Does your state charge an income tax? If so you can claim the amount you paid in state income tax as a deduction against your federal income taxes. If your state does not charge you an income tax (or even if they do) you may still be able to claim a state sales tax deduction. It’s worth noting that during the calendar year of 2012, the state sales tax deduction was not allowed. It expired at the end of 2011. But in January of this year, congress retroactively established a state sales tax deduction for 2012.

You can claim a deduction for either your state income tax or your state sales tax. You are not allowed to claim both. So which one should you use? It depends. While filing your taxes you’ll come to some idea of what your state income taxes amount to. But you most likely have no idea what your sales tax expenditures were unless you kept meticulous records. Fortunately, the IRS allows you to use a tax table to estimate your sales tax expenditures instead of using the actual amount you paid. (Please be aware that if you use the actual amount method, you must be able to provide receipts as backup for the deduction.)

For more details, see the 2012 Instructions to Schedule A – (Form 1040) on the IRS website. Therein you’ll also find the tax tables to help you determine if you should take the state income tax deduction or the state sales tax deduction.