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.
When should you deduct sales tax?
First, 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.
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.
Not sure whether to itemize or take the standard deduction? Here’s what to do: Enter all your itemized information when you’re filling out your tax return. TaxSlayer will automatically determine which method is right for you, so you get the biggest refund you deserve.
Calculating 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. That’s okay. If you don’t know the exact amount of sales tax you paid, you can use the IRS sales tax deduction calculator to get an estimate. The calculator is a free tool. It takes about 5-10 minutes to enter the information, and you’ll wind up with the amount you can deduct.
Sales tax in foreign countries
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.
Value-Added Tax (VAT)
Do you travel to the European Union (EU)? If so, remember to claim your Value-Added Tax (VAT) before you leave. VAT is paid by the consumer, 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’ll need to fill out a tax-free form. You can ask a salesperson for the form in the store where you are making a purchase. Some places will refund your VAT on the spot. Others will require you to complete the forms and mail them in.
If necessary, take your tax-free forms to Customs at the airport before you leave the EU. They will verify your purchase and ask 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.