Federal tax law allows taxpayers who elect to itemize deductions to deduct their state and local income taxes or state and local general sales taxes to reduce their federal income tax.
This law is especially important for residents of six states that do not have an income tax, but do have sales taxes. They are: Florida, Nevada, South Dakota, Texas, Washington and Wyoming (Alaska has no income or sales tax). Also retired teachers receiving a New York City pension who are residents of New York State and pay no state and local income tax on their New York City pension can benefit from this law.
Under this law, individuals who elect to file an itemized federal income tax return for 2013 must file “Schedule A-Itemized Deductions” and complete line 5 “State and local (check only one box): a. Income taxes, or b. General sales taxes.”
By electing “b. General sales taxes,” you have two choices. One is actual expenses; you can deduct the actual state and local general sales taxes you paid in 2013. Generally you can deduct the total, but the total may have to be adjusted for certain items (see Schedule A instructions for complete details). The IRS cautions “you must keep your actual receipts showing general sales taxes paid to use this method.”
The second choice is to use the federal “2013 Optional State and Certain Local Sales Tax Table.” This choice is a calculation requiring no receipts to provide in the event of an audit. The tables are based on your adjusted gross income (2013 Form 1040, line 37) plus any nontaxable items such as tax-exempt interest, veterans benefits and nontaxable Social Security benefits (see Schedule A instructions for additional items) and the number of exemptions you claimed on Form 1040, Line 6d. The tables represent only the allowed state taxes; be sure to add local sales taxes if applicable.
For full-year New York City residents, the deduction will more than double the chart amount. You must complete the worksheet on page A–5 of the “2013 Instructions for Schedule A” or use the 2013 Sales Tax Deduction Calculator on the IRS website. In addition, you may be able to add sales taxes paid on specified items such as a motor vehicle, boat or major home renovation (see instructions for additional items).
Residents living in a state that has both income and sales taxes can deduct whichever is greater, but not both. Be sure to check whether it is better to take the standard or itemized deductions.
Please read the instructions carefully and/or consult your tax adviser for all tax matters.