IRS Newest deduction hangs on sales tax
It's most valuable for people in states with no or very low income taxes.
WASHINGTON (AP) -- Sharpen your pencils. There's a new tax break on the books, but it could take some work to discover whether it can help you.
The new deduction, available in 2004 and 2005, lets taxpayers deduct state sales taxes in lieu of state income taxes if it helps lower their tax bills.
There's also new help for military and lower income families, and simpler tax return forms are available to more people.
Tax advisers say there aren't as many changes to contemplate as there have been in recent years but caution that tax laws seem to be in constant flux.
Sales tax deduction
The new sales tax deduction is most valuable for people in states with no or very low income taxes, but it could be useful to taxpayers in other states. Anyone who made major purchases last year, and some retired taxpayers who pay little income tax, might be better off taking a sales tax deduction.
Taxpayers should look long and hard at their options because it's "very confusing, not for everybody in every state, and changes state to state vary dramatically," Winters said.
To figure your deduction, you can use a table provided by the IRS or add up the sales taxes paid in 2004. The law, passed late last year, didn't give taxpayers much time to prepare. Taxpayers who didn't keep their sales receipts last year can start accumulating those piles for 2005.
Bob Scharin, editor of RIA's Practical Tax Strategies, a journal for tax professionals, said taxpayers might review their spending and think about any big-ticket items they might have purchased, such as the future groom who purchased an engagement ring or the parents who paid for the wedding. Sales taxes on that spending could add up to more than the IRS average provided in the table.
"The deduction is not big enough to tell you shop till you drop," Scharin said, saying it roughly equals a cash back program offered by some credit cards.
Justin Ransome, a senior manager in private client advisory services at global accounting firm KPMG, said the benefits may be rather limited for taxpayers in states with income taxes.
"I question whether very many people are going to get a big bang out of this," he said. "I think it's worth going through the calculation."
Taxpayers can add any general sales taxes paid on cars, trucks, boats, homes and building materials to the amount in the IRS table. That could make the sales tax deduction a better bet, even if you live in a state with income taxes.
"If you bought a couple of Hummers and a yacht with your disposable income, you might very well find that the sales tax deduction is a better bet for you," said Jackie Perlman, a senior tax research coordinator at H & amp;R Block.
If you plan to take the state sales tax deduction, figure in your local general sales tax for an even bigger benefit. A worksheet provided by the IRS can guide you through the computation.
Taking the sales tax deduction might introduce new tax complications into your life. You must itemize your deductions to get the benefit, and that means saving your receipts for other deductible expenses like contribution to charities.
One change could make filing a little easier: More taxpayers became eligible to use simpler tax forms, 1040EZ and 1040A, with a change that doubled the amount of money a qualified taxpayer can earn.
Taxpayers earning up to $100,000 can now use simpler tax returns, if they meet other qualifications. Taxpayers must be younger than 65, with no dependents and limited interest income to use the 1040EZ.
Those with slightly more complicated transactions, incomes and expenses can use the 1040A if they don't itemize their deductions. They can still claim certain credits for their children, adoption, retirement and other benefits.
But taxpayers who make more than $100,000 get an added complication this year. They'll have to use a worksheet to compute taxes owed, instead of the traditional tax tables.