How to Deduct State and Local Sales Taxes from Your Federal Income Taxes

Most of people end up paying hundreds of dollars per year too much in Federal Income Taxes because they aren’t aware of what deductions that they qualify for. The Federal tax code has become so complicated that it’s extremely difficult for individuals to figure out how to minimize their tax burden without paying hundreds of dollars to a CPA to navigate the tax code for them. One deduction that almost everyone will qualify for, but very few people take advantage of, is the deduction for paid state and local sales taxes.

If your city, county, or state collects any sort of sales tax, you will qualify for this deduction. You don’t even need to keep receipts for the sales taxes that you pay. The IRS provides a calculator which will determine a dollar amount based upon your locality’s sales-tax rate of how much that you can deduct. The city which I live in collects a 6% sales tax (4% state, 2% local). For my 2009 taxes, I was able to deduct $780.00 without collecting any receipts at all.

For most people, not collecting the receipts and taking the average based on the IRS’s calculator is the way to go. If you have made a few large purchases in the year, you can instead specify the sales taxes that you’ve paid for the deduction instead. For Example, if I bought a $20,000 item and had a receipt for that, I would have paid $1,200 in sales taxes on that item alone, meaning that I could deduct that much rather than the $780 average that the IRS will let me deduct without any receipts at all.

In order to qualify for this deduction, you do need to itemize your deductions. Usually it’s a good idea to calculate and determine if your itemized deductions are greater than what your standard deduction would be, and then itemize your deductions if it results in a greater refund. If you’re a college student, own a home or do a large amount of charitable giving you will almost certainly come out ahead by itemizing your deductions.

There are other types of taxes that you can deduct from your Federal income taxes as well. You can deduct any local, state, or foreign income taxes that you paid in much the same manner. You can also deduct any real estate taxes, such as property taxes, from your return. The IRS has a publication on what taxes you can deduct. If you go to their website, you’ll want to look for “Topic 503. – Deductible Taxes.”