Currently, you are allowed an income tax deduction for the greater of your state and local income taxes and your state and local sales taxes. A little over a year ago, the PATH Act made “permanent” the break allowing taxpayers to deduct state and local sales taxes as an itemized deduction in lieu of state and local income taxes. For many taxpayers their income taxes will substantially exceed their sales taxes, and therefore, not provide any benefit. However, if you reside in a state with no or low income taxes or you purchase major items, such as a car or boat, this break can be valuable.
2016 Tax Return
You do not have to document all of the sales tax you actually paid during the year. You can use the IRS sales tax calculator to determine your deduction based on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases (for which you will need substantiation). Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax and deduct the greater.
If you are in the Alternative Minimum Tax (“AMT”), it does not matter, since neither is deductible for AMT purposes.
2017 and Beyond
If you’re considering making a large purchase in 2017, you shouldn’t necessarily count on the sales tax deduction being available on your 2017 return. Recent Republican proposals have included elimination of many itemized deductions, and President Trump has proposed putting a cap on itemized deductions (see our summary - 11/17/16 client alert). Which proposals will make it into tax legislation in 2017 and when various provisions will be signed into law and go into effect is still uncertain.
Do you have questions about the sales tax deduction or other breaks that might help you save taxes on your 2016 tax return or the impact of possible tax law changes on your 2017 tax planning? Contact us — we can help you maximize your 2016 savings and effectively plan for 2017. You can reach me at HZemel@BerdonLLP.com or contact your Berdon advisor.
Hal Zemel, a Tax Partner at Berdon LLP, New York Accountants, has nearly 25 years in public accounting and advises businesses in the manufacturing, distribution, advertising, and real estate sectors.