Sales Tax Deduction: What Is It and How Does It Work
Sales tax can add up, especially if you’re renovating your home or making a major purchase. The good news is that you have the option to claim back some sales tax that you pay through the general sales tax deduction. US taxpayers can claim up to $10,000 in a combined total deduction for state and local income, sales, and property taxes on their income tax returns, helping to offset the cost of those major purchases. Explore some common items that fall under the sales tax deduction and learn how to claim the deduction.
- The sales tax deduction is a tax relief that lets you claim back sales tax that you’ve paid.
- The maximum combined deduction for taxes you paid is $10,000 ($5,000 for married filing separately).
- The deduction applies to a wide variety of items, from everyday grocery purchases to electronics and vehicles.
- You can choose to claim sales tax by itemizing deductions or claim the standard deduction, but not both.
- Calculate sales tax deductions by adding up actual sales taxes you’ve paid or estimating using sales tax tables.
- Claim your sales tax deduction on Schedule A when you file your income tax return.
Table of Contents
- What Is a Sales Tax Deduction?
- Common Items Eligible for Sales Tax Deduction
- How do Sales Tax Deductions Work?
- How to Calculate Sales Tax Deduction
- How to Claim Sales Tax Deduction
- FreshBooks Makes Tax Preparation Easy
- Frequently Asked Questions
What Is a Sales Tax Deduction?
A sales tax deduction is a tax relief that allows you to deduct retail sales tax that you’ve paid on your purchases during the tax year. This deduction applies to state and local general sales taxes and can help you reduce your taxable income and reduce the overall amount you pay in taxes. It’s important to note that you have the option to deduct either general state and local sales taxes or state and local income taxes on your return, but not both. If you pay more in state and local sales tax than you do in income tax, the sales tax deduction can help you save more.
Common Items Eligible for Sales Tax Deduction
If you’re wondering whether sales taxes paid on an item you’ve purchased are deductible, the answer is likely yes. You can claim the sales tax deduction on a wide variety of items, from everyday purchases like groceries to major purchases. Some common items and big-ticket items that you can claim include:
- Electronics like phones, laptops, and TVs
- Furniture for your home
- Jewelry including engagement and wedding rings
- Cars and other motor vehicles
- Mobile and motor homes
- Recreational and off-road vehicles
- Supplies for home renovations
These are only a few of the things for which you can claim the sales tax write-off. In general, if you initially paid sales tax on the item, you’re able to add it to your sales tax deduction when you file your taxes. If you choose to claim the actual amount of sales tax you paid, you need to keep copies of your receipts or invoices in case of an audit.
Looking for ways to make tax season easier? Discover how FreshBooks takes the pain out of tax preparation for tips and tricks to make filing a breeze.
How do Sales Tax Deductions Work?
There are 2 ways to approach your tax deductions: you can choose to take the standard deduction or to itemize your deductions and claim a variety of smaller deductions including sales tax on Schedule A (Form 1040). The standard deduction for single filers and married couples filing separately is $13,850 for 2023. Almost all US taxpayers can choose to claim this deduction if they wish.
The alternative to the standard income tax deduction is itemized deductions. This means you go through and add up all the deductions you’re eligible for, including the general state and local sales tax deduction. The maximum amount you can claim for the total state and local income, sales, and property tax deduction is $10,000, or $5,000 for married couples filing separately. When you file, you’ll need to list all your itemized deductions on Schedule A, Forms 1040 or 1040-SR.
When deciding which deduction you want to claim, tally up your itemized deductions, including sales taxes paid. If this exceeds the amount of the standard deduction, you may want to choose to itemize your deductions. You have the choice every year, so even if you usually take the standard deduction, you may find itemized deductions may save you more money if you’ve made a large purchase that you want to claim the sales tax deduction on.
How to Calculate Sales Tax Deduction
If you decide to itemize and claim your sales tax deduction, there are 2 ways you can calculate this:
Actual Sales Tax Paid
The first way to calculate your sales tax deduction is to keep careful records of your purchases and how much local sales taxes you paid, and then add up all of this information when you prepare to file. This can work well if you’re mainly interested in claiming sales tax on several large purchases in a given tax year, or if you have recurring purchases that are easy to track.
State and Local Sales Tax Tables
If you don’t have records of all your purchases, the IRS allows you to estimate your sales tax amounts. They offer a set of tables with state and local sales tax rates to help you calculate the amount of your deduction based on the state and locality you resided in during the year. You can also use the IRS sales tax calculator. This can be helpful if you’re looking to claim tax on a variety of smaller items, or if you simply don’t have receipts or other records from your purchases.
You can also use the tables to estimate most things, and add in actual sales tax paid on major purchases if you only keep records for larger amounts.
How to Claim Sales Tax Deduction
Here are the basic steps to claim a sales tax deduction when you file your taxes:
- Keep records of major purchases: Whether you keep paper receipts or electronic statements, it can be helpful to save sales tax information for large purchases.
- Calculate your sales tax deduction: You can do this either by adding up your purchases or using the IRS tables to estimate. Remember that the maximum amount you can claim on taxes paid (including property taxes) is $10,000 per filer ($5,000 for married filing separately).
- Itemize your deductions using Schedule A: You’ll use this form to itemize any deductions you’re claiming, including sales tax.
FreshBooks Makes Tax Preparation Easy
The sales tax deduction can be a great way to save money on your taxes, especially if you’ve made major purchases this year. Single filers and married couples filing separately are eligible to claim up to $5,000 on the sales tax deduction, which encompasses a wide range of common and large purchases.
When you’re calculating your sales tax deduction, it’s helpful to have records of your major purchases. FreshBooks accounting software is an easy way to keep track of your records so you can make the most of all your deductions. Try FreshBooks free to get started preparing your sales tax deduction and find even more FreshBooks support for tax season.
Learn even more about tax deductions by exploring resources for Small Business Tax Deductions to help you maximize your tax write-offs today.
FAQs About Sales Tax Deduction
Looking for more information about the sales tax deduction? Browse answers to frequently asked questions on eligibility, limitations, and more.
Can you deduct sales tax if you don’t itemize?
The sales tax deduction is only available if you itemize your taxes. However, calculating your sales taxes can help you decide whether to itemize—if you find your total item deductions exceed the standard deduction amount, it’s better to itemize on your tax return. You can’t claim both the general state and local sales tax and the state and local income tax deduction.
What is sales tax exemption vs deduction?
A sales tax exemption means you don’t pay any sales tax at the time of purchase, whereas a deduction means you pay it and then deduct it from your taxable income later when you file your taxes. Sales tax exemptions will not have an impact on your filing, but deductions are something you can claim.
Is sales tax deductible on Schedule C?
Sales tax deductions are filed on Schedule A when you itemize your tax deductions. All itemized deductions are filed on Schedule A, and you must itemize if you want to claim the sales tax deduction. FreshBooks accounting software can help you track your sales tax purchases to make itemizing a breeze.
What if I made purchases in multiple states with different tax rates?
If you’ve made purchases in states with different tax rates, you’ll have to use the IRS tax tables or total sales tax paid method for each state you made purchases in. There is also a deduction worksheet available to help you figure out the amount to claim. Then add up all of the totals when you use Schedule A to claim your sales tax deduction.
Who is eligible for the sales tax deduction?
Almost all US taxpayers are eligible to claim the sales tax deduction if they choose to itemize their deductions. The main reason someone would be ineligible is if they choose to claim the standard deduction instead—only those who file itemized deductions can include the sales tax deduction.
Are there any limitations to the sales tax deduction?
Yes, you can’t claim more than $10,000 per year, (or $5,000 for married couples filing separately), in a total combined deduction for state and local income, sales, and property taxes paid. Additionally, you have to itemize your deductions if you want to claim the sales tax deduction.
About the author
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .