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Federal Sales Tax Deduction

Federal Sales Tax Deduction: What Does It Mean to You?

You may have heard that you can deduct sales tax from your federal tax return. However, you are probably wondering what that means or how much you can deduct. After all, you would think that you probably pay a large amount of sales tax on an annual basis. While this is true, there are limits on how much you can deduct, and who can deduct what, that you should be aware of. Consider the following rule to determine if you should mess with keeping track of your sales tax.

Do You File State Taxes?

In states where you do not file state taxes you can deduct the amount of state sales tax you pay from your tax return. However, if you file state taxes you must choose between claiming your state income tax or your state sales tax as a deduction. You also have to itemize your federal taxes if you want to take your sales tax as a deduction. Therefore, you should determine whether you will get a bigger return by filing a regular return and taking the standard deduction or whether you will get a bigger break by itemizing your write offs.

Are You Willing To Keep Track and Mess With It?

If you would like to claim your sales tax as a deduction on your federal taxes you will be required to keep each and every receipt that you receive for at least five years. Imagine keeping every grocery store receipt, gas receipt, or shopping purchase receipt. You could end up with thousands of receipts by the end of one year. Once it is time to file your taxes you will be required to add all of your sales tax up. This could take days and days if you are not good at looking through columns of numbers and calculating. However, if you are willing to put forth the effort you may just get a big break on your federal taxes.

Calculating Your Tax

While many people think that they can deduct every dime they pay in sales tax, this is not true. In fact, depending on your income, you may only be able to deduct a fraction of what you actually paid for sales tax. Once you have added up the amount you paid in state sales tax for the year you will have to refer to the IRS's table to determine what amount you can claim. The amount is based on your adjusted gross income. Therefore people in a higher tax bracket will often deduct more than those who owe less in taxes.

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