Did you know that sales tax is deductible on your tax return? But before you jump in and start writing off what you paid for sales tax this year, you’ll want to understand the rules for the deduction. As it turns out, deducting sales tax may not always work in your favor – keep reading to find out why.
What is the sales tax deduction?
It’s important to know that sales tax is an itemized deduction. That means that if you take the standard deduction, you won’t be able to deduct sales tax. For many people, it makes more sense to take the current standard deduction than to itemize, because the deduction for state and local taxes, including sales tax, is capped at $10,000.
When should you deduct sales tax?
When deciding whether to deduct sales tax on your federal tax return, consider your financial situation, the standard deduction for the current tax year, and state tax policies.
If you do itemize your deductions, the IRS says that you can deduct:
- What you paid in state and local general sales tax OR
- Your state, local, and foreign income tax for the year
In other words, you’ll have to choose one or the other. It makes sense to deduct sales tax instead of income tax if you live in a state that does not have income tax. It might also make sense if you purchased a big-ticket item, like a car or a trailer.
How to estimate the sales tax deduction
When you claim the sales tax deduction in TaxSlayer, you’ll be asked to enter the amount paid for sales tax during the year. If you have receipts for all your purchases, you can give an actual number. Of course, that type of record-keeping is difficult, and many people won’t have all their receipts.
If you don’t know the exact amount of sales tax you paid, you can use the free IRS sales tax deduction calculator to get an estimate. You’ll need to provide some basic information, including your state of residence, the total income you earned during the year, and the number of purchases you made. The calculator will use your state’s sales tax rate and typical spending habits to estimate the sales tax you probably paid.
Can you deduct sales tax paid in foreign countries?
Unfortunately, no. If you traveled outside of the United States and you paid sales tax to a foreign country, that will not count toward your deduction on your U.S. federal tax return. However, if you earned income abroad, you may qualify for tax credit.
Is sales tax deductible for businesses?
Business owners can usually deduct sales tax on items directly related to their operations, like inventory or office supplies, on their tax returns. Personal purchases do not qualify. They can either deduct the actual sales tax paid or use IRS sales tax deduction calculator. State-specific rules and limitations based on business structure (like S Corporations or partnerships) can affect deductibility.
How to get Value-Added Tax (VAT) back
If you travel to the European Union (EU), remember to claim your Value-Added Tax (VAT) before you leave. The consumer pays VAT, but when you are not a resident of the EU, you are entitled to a refund of your VAT before you return to your home country.
To get your VAT back, you must fill out a tax-free form. You can ask a salesperson for the form in the store where you purchase.
Some places will refund your VAT on the spot. Others will require you to complete the forms and mail them in. To access these tax-free benefits, you may be asked to provide proof of U.S. residency — complete Form 6166, Certification of U.S. Residency to verify your tax-free status.
If necessary, take your tax-free forms to the U.S. Customs and Border Patrol area at the airport before you leave the EU. They will verify your purchase and ask you to see your passport before stamping your forms.
The process is somewhat lengthy, but it may be worth it. Some countries charge a lot for VAT. Say you spend a thousand dollars on luxury goods in London. Going through the motions of recovering your VAT could put a good portion back in your pocket.
Need help determining whether to itemize or take the standard deduction? TaxSlayer can help – just enter all your itemized information when completing your tax return, and the program will automatically determine which method is right for you so you get the biggest refund you deserve.
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