[ return to list ]

Choose Your State Tax Deduction Carefully

Individual taxpayers have a choice at tax return time—to deduct their state and local income tax or their state and local sales tax. Which is best for you? It depends.

For individual itemizers residing in states with relatively high state income tax, taking the deduction for state income tax for the 2005 tax year is generally advisable. Conversely, individuals in states with no income tax or a low income tax will generally fare better by deducting state sales tax.

How can deductions for state sales tax be substantiated if receipts from early last year have not been retained? The IRS allows taxpayers to (1) deduct the actual sales tax they paid or (2) deduct an amount from an IRS table plus the actual amount for purchases for cars, boats and certain other “big-ticket” items. The IRS table is based on state-by-state consumption of residents.

Under current law, the deduction for sales tax is not available for tax years after 2005. So this may be the last year you have a choice on your tax return.

Practical advice: Unless there is a clear-cut difference, it makes sense to have the deduction for state income tax compared to the deduction for state sales tax. It does not matter which choice you made last year.

[ return to list ]