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. Tennessee only taxes dividends and interest income so residents may also benefit from this federal tax law. 

New York State residents receiving a pension from a federal government, a New York State government or a New York State local government are not subject to New York State or New York City income tax. So a UFT retiree who is a resident of New York State and receiving a pension from the Teachers’ Retirement System may benefit from this law. 

Under this law, individuals who elect to file an itemized federal income tax return for 2016 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. First choice is actual expenses; you can deduct the actual state and local general sales taxes you paid in 2016. Generally you can deduct the total, but the total may have to be adjusted for certain items (see 2016 Instructions for Schedule A – Form 1040 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 “2016 Optional State Sales Tax Tables.” 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 from “Form 1040: U.S. Individual Income Tax Return, line 37”(plus any nontaxable items such as tax-exempt interest, veterans benefits and nontaxable Social Security benefits; (see page A–4 of Schedule A instructions for complete list) and the number of exemptions you claimed on Form 1040, line 6d. 

Full-year New York State residents use the New York table found on page A–16 of Schedule A Instructions. The table represents only the allowed New York State amount. 

Full-year New York City residents also use the 2016 Optional Local Sales Tax Tables – Local Table A found on page A–18 of Schedule A Instructions. Local Table A amount is needed to complete the worksheet on page A–5 of Schedule A Instructions.

In addition, you can add sales taxes paid on specified items such as a motor vehicle, a boat or a major home renovation (see page A–6, line 7 of Schedule A Instructions for complete list). 

Calculate the allowed sales tax deduction using the worksheet on page A–5 of Schedule A Instructions. To assist you in completing the worksheet, use the example below as a guide:

Double-check your worksheet or let the IRS figure the allowed sales tax deduction by using the “Sales Tax Deduction Calculator” on the IRS website.

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.