Sales Tax Deduction: Are U.S. Shoppers About to Lose a Big Tax Break?
Until this year, the IRS allowed you to take a federal deduction for state and local sales taxes. But unless Congress extends that provision, shoppers could lose a pretty substantial deduction on their tax returns come April -- one of the many tax breaks in line to expire as part of the impending fiscal cliff.
It's Only Fair
The sales tax deduction was enacted due to complaints from the millions of taxpayers who live in the seven states that don't have a state income tax. Under old tax law, taxpayers were entitled to a federal deduction for the state income taxes they paid, but couldn't take an equivalent deduction on their federal returns for sales taxes. That put an unfair burden on people in states like Texas and Florida, which don't have state income taxes but do have sales taxes.
Taxpayers had two choices for calculating their deduction: Either track all their purchases throughout the year, collecting their receipts and claiming the actual amount of tax they paid. Or figure out an appropriate deduction by using an IRS calculator that's based on their income, the number of personal exemptions they claimed, and their state of residence.
For instance, a family of four living in Florida earning $45,000 could claim $686 in deductible sales taxes, corresponding to spending of about $11,400. A four-member family earning $110,000 could claim a much larger amount, $1,104, reflecting the assumption that the larger family would spend closer to $18,400 on items with sales tax throughout the course of a given year.
Will the Deduction Return?
Many experts believe that the federal deduction for state sales tax will get reinstated in a fiscal cliff resolution. But it's just one in a long list of provisions that went away or are slated to go away, so it's far from a sure thing.
The simplest way to figure what your deduction would have been last year is to use the IRS calculator here. But unless the federal government gets its act together, shoppers may find themselves out of luck this year.
Motley Fool contributor Dan Caplinger deducts his state income tax happily. You can follow him on Twitter @DanCaplinger.