[Monga]

Assuming HR4520 passes this week as CCH Tax News expects, taxpayers will have a brand new option to elect to deduct sales taxes instead of state and local income taxes. This option is available even if your state has an income tax. For example, if you itemize deductions but your income is too low to pay much state income tax, you will benefit. You can use sales tax tables or actual sales tax, with some minor adjustments described in the legalese below.

This is very big news for tax preparers.


Full legalese follows:

SEC. 501. DEDUCTION OF STATE AND LOCAL GENERAL
SALES TAXES IN LIEU OF STATE AND LOCAL INCOME TAXES.

(a) IN GENERAL.—Subsection ( of section 164 (relating to definitions and special rules) is amended by adding at the end the following:
‘‘(5) GENERAL SALES TAXES.—For purposes of subsection (a)--
‘‘(A) ELECTION TO DEDUCT STATE AND LOCAL SALES TAXES IN LIEU OF STATE AND LOCAL INCOME TAXES.—
‘‘(i) IN GENERAL.—At the election of
the taxpayer for the taxable year, subsection (a) shall be applied—
‘‘(I) without regard to the reference to State and local income taxes, and
‘‘(II) as if State and local general sales taxes were referred to in a paragraph thereof.
‘‘( DEFINITION OF GENERAL SALES TAX.—The term ‘general sales tax’ means a tax imposed at one rate with respect to the sale at retail of a broad range of classes of items.
‘‘© SPECIAL RULES FOR FOOD, ETC.—In the case of items of food, clothing, medical supplies, and motor vehicles—
‘‘(i) the fact that the tax does not apply with respect to some or all of such items shall not be taken into account in determining whether the tax applies with respect to a broad range of classes of items, and
‘‘(ii) the fact that the rate of tax applicable with respect to some or all of such items is lower than the general rate of tax shall not be taken into account in determining whether the tax is imposed at one rate.
‘‘(D) ITEMS TAXED AT DIFFERENT RATES.—Except in the case of a lower rate of tax applicable with respect to an item described
in subparagraph ©, no deduction shall be allowed under this paragraph for any general sales tax imposed with respect to an item at a rate other than the general rate of tax.
‘‘(E) COMPENSATING USE TAXES.—A compensating use tax with respect to an item shall be treated as a general sales tax. For purposes of the preceding sentence, the term ‘compensating use tax’ means, with respect to any item, a tax which—
‘‘(i) is imposed on the use, storage, or consumption of such item, and
‘‘(ii) is complementary to a general sales tax, but only if a deduction is allowable under this paragraph with respect to items sold at retail in the taxing jurisdiction which are similar to such item.
‘‘(F) SPECIAL RULE FOR MOTOR VEHICLES.—In the case of motor vehicles, if the rate of tax exceeds the general rate, such excess shall be disregarded and the general rate shall be treated as the rate of tax.
‘‘(G) SEPARATELY STATED GENERAL SALES TAXES.—If the amount of any general sales tax is separately stated, then, to the extent that the amount so stated is paid by the consumer (other than in connection with the consumer’s trade or business) to the seller, such amount shall be treated as a tax imposed on, and paid by, such consumer.
‘‘(H) AMOUNT OF DEDUCTION MAY BE DETERMINED UNDER TABLES.—
‘‘(i) IN GENERAL.—At the election of the taxpayer for the taxable year, the amount of the deduction allowed under this paragraph for such year shall be—
‘‘(I) the amount determined under this paragraph (without regard to this subparagraph) with respect to motor vehicles, boats, and other items specified by the Secretary, and
‘‘(II) the amount determined under tables prescribed by the Secretary with respect to items to which subclause (I) does not apply.
‘‘(ii) REQUIREMENTS FOR TABLES.—
The tables prescribed under clause (i)—
‘‘(I) shall reflect the provisions of this paragraph,
‘‘(II) shall be based on the average consumption by taxpayers on a State-by-State basis (as determined by the Secretary) of items to which clause (i)(I) does not apply, taking into account filing status, number of dependents, adjusted gross income, and rates of State and local general sales taxation, and
‘‘(III) need only be determined with respect to adjusted gross incomes up to the applicable amount (as determined under section 68().
‘‘(I) APPLICATION OF PARAGRAPH.—This paragraph shall apply to taxable years beginning after December 31, 2003, and before January 1, 2006.’’.
( EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2003.

Thanks to myf16

[Cole]

Am I reading this wrong or is it saying sales tax is tax deductible?

[kar522]

Am I reading this wrong or is it saying sales tax is tax deductible?

The way I read it, sales tax might be deductible if you can itemize....won't help DH and myself a bit....haven't been able to itemize for years...and that's a good thing...

This post has been edited by kar522: 10-9-04, 2:15am

[msh11]

brand new option to elect to deduct sales taxes instead of state and local income taxes.

What I'm seeing is this (?)...you will be able to weigh out which would be better for you while preparing your taxes, either paying the state and local income taxes, or sales tax you have paid through the year (great if you buy a lot and are a good record /receipt keeper for the all important documentation in the even of a challenge by the IRS and I wonder if cc statements would suffice). I have no sales tax in my state, and this time would be the first time I would say boo to the fact I don't.

If you're used to taking deductions for a business, saving receipts is something you do anyway.

Start looking for tossed out receipts at the stores...now a hot commodity...especially the ones who paid with cash.

[cODB3]

I'll be shocked if this passes. It would open up waaaaaay too many loopholes.

[NARC]

Start looking for tossed out receipts at the stores...now a hot commodity...especially the ones who paid with cash.

Oh now, that is just plain sneaky!!!

[Monga]

gas receipts also have sales tax added to them....

[dewolfxy]

I'll be shocked if this passes.  It would open up waaaaaay too many loopholes.

This used to be a law about 20 years ago. Definitely I agree it seems to be ripe for abuse. More than anything, though, it's just a major pain to keep track of, I would imagine. Really helps people in states with no state income tax, though - Florida, for one.

[WingsOverVA]

Before 1986 we could deduct sales tax as well as state income tax but that was before the tax rates were reduced with the 1986 Tax Reform Act.

However this act is mainly to benefit the residents of the 9 states that do not have state income taxes or only tax interest and dividends. This act would bring some equity to residents of those states but would be of little benefit to residents of the other states.

Under current law, individuals are only permitted to deduct state income and property taxes on their federal tax returns. Seven states — Alaska, Texas, Florida, Wyoming, Washington, South Dakota, and Nevada — do not have a state income tax. Two states -- Tennessee and New Hampshire -- only impose an income tax on interest and dividends, but not wages. Therefore, residents of these states who itemize are placed at a disadvantage simply because these states choose to raise revenue primarily through a sales tax instead of an income tax.

[WingsOverVA]

Oh, and don't worry about saving any receipts:

The proposed federal legislation would allow taxpayers to deduct either their state income tax or state sales taxes paid in a given year. By giving the choice of deducting either sales or income taxes, the fiscal impact is lessened, but equity and fairness are restored across states. All taxpayers would be able to determine which deduction would work best for them.

To promote simplicity, the Internal Revenue Service would be directed to develop standard tables for taxpayers to use in determining their average sales tax deduction. Such tables, similar to those used prior to 1986, would provide the deduction amount, based upon income and household size, for a taxpayer in a given state. The bill does not allow for the itemized deduction of individual purchases, so there is no need to save sales receipts or other similar paperwork.

[dewolfxy]

Those tables will of course be based on some "standard" sales tax level. That quote seems to indicate you CAN'T save receipts and total them up. However, I read something that indicated you could save receipts. If you spend a lot on taxable items, saving your receipts could be worthwhile as it might exceed the deduction from the table. That's assuming it's actually allowed.

[WingsOverVA]

From what I followed with the CSPAN televised discussion the only receipts that would be allowed would be for major purchases like multiple cars or other expensive things that would put you over the table amount. But when dealing with Congressional legaleze and the tax code anything is possible.

[cODB3]

Now this is making a little more sense. I can see them passing it if they use a deduction table and don't permit itemizing of sales tax. Even if the deduction is low, any amount will benefit me. I live in a state with no income tax, but I pay 9.75% sales tax on EVERYTHING (even food!).

[mykoleary]

I talked to my Cngressman's office not more than a minute or two ago. According to them it passed the House on 10/7/04 and had already passed the Senate.

Now all that awaits is a Presidential signature and we're good to go!!!!

[dewolfxy]

Apparently this bill (which has now passed house & senate and just awaits the President's signature, which is a sure thing) also includes the closure of the $100K SUV loophole - link.

I think I found the discrepancy over itemizing sales tax receipts or not - in the original bill language, it said you "may" use the tables. That was how it was when it used to exist some years ago, you could use a table or itemize. In the version the President is about to sign it was changed to "shall" use the tables (changed in committee) . So that makes sense to me. Basically it tries to make it more fair for states that have sales tax but no income tax, and that seems perfectly reasonable. The whole idea of itemizing sales tax receipts just seems like a nightmare anyway.

This post has been edited by dewolfxy: 10-12-04, 6:55am

[mydeal]

Thanks for the clarification(s) wolfy.

[mykoleary]

Having to save receipts & itemize sales tax from receipts would be such a nightmare!! Am looking fwd to seeing those deduction tables.. I live in a state with no income tax but pay 8.25% sales tax.

8.8% in King County WA

I'm psyched!

[rasheed]

I have heard this a few of the states involved with no state income tax are also considered important for election purposes (timing of bill).

Rasheed