The next time your mate says you shop too much, explain that you're trying to cut your tax bill. Every time you pay sales tax, you can save your receipts and deduct sales tax off your taxable income at year's end. While this may not seem like much, think about large items such as cars and television sets. The sales tax on those items can really add up. Look at sales tax deduction guidelines.
Income Tax vs. Sales Tax Deduction
If your state has an income tax, you have to make a choice: You can either deduct state income tax or sales tax from your federal taxable income. You can't deduct both. Kay Bell at Bankrate.com says most people benefit from deducting state income tax, but you should check your sales tax figure just in case. If you live in a state that has no income tax, take advantage of the sales tax deduction.
Sales Tax vs. Standard Deduction
Don't put your calculator away yet. You have to compare your sales tax savings to your standard deduction. For 2012 married couples filing a joint return can deduct $11,900. Single individuals and married couples filing separate returns can deduct $5,950. Here's the catch. If you take the standard deduction, you can't itemize. If you itemize deductions, you can't take the standard deduction. You have to add up your sales tax and your other itemized deductions and compare that figure to the standard deduction to see which method gives you a lower tax bill.
Lumping State and Local Taxes Together
If you decide to itemize, remember that sales tax is only one of the taxes you can deduct from your federal taxable income. You can write off state auto licensing fees (but not your license plate fee) and state property taxes. Don't forget local taxes, such as county property taxes and local income taxes. Sales tax is just part of a bundle of tax expenses you can write off if you itemize.
Limit on Sales Tax Deduction
Here's the limit for deducting sales tax: none. You have no limit on how much sales tax you write off. Even if you don't have receipts for every purchase, go through your credit card records and find purchases. You can figure how much of the purchase was sales tax based on your state's sales tax rate. After you go through all of those credit card bills, write yourself a memo for next year: "Save those receipts."
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.