A good new for Washingtonians: Seattle Times reported that the House has passed a bill that will allow state of Washington residents to deduct their state sales tax in their federal tax returns for tax year 2004 and 2005.
This new rule allows people to choose to deduct from state income tax or state sales tax (which is higher), so it basically only applies to all states that has sales tax but no state income tax (residents in states with state income tax are already able to deduct state income tax in federal tax returns). Besides Washington, the other applicable states are: Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Also, only itemized deduction fliers will be able to claim this tax benefit. The bill is still up to Senate and President signature to become a law, although the Seattle Times article suggests that it is very likely to happen.
A search on the United States House of Representatives website reveals the details of the bill (Section 501):
TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES
SEC. 501. DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES IN LIEU OF STATE AND LOCAL INCOME TAXES.
(a) IN GENERAL.--Subsection (b) 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.
``(B) 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.
``(C) 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 (C), 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 TO BE DETERMINED UNDER TABLES.--
``(i) IN GENERAL.--The amount of the deduction allowed under this paragraph shall be determined under tables prescribed by the Secretary.
``(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, 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(b)).
``(I) APPLICATION OF PARAGRAPH.--This paragraph shall apply to taxable years beginning after December 31, 2003, and before January 1, 2006.''.
(b) EFFECTIVE DATE.--The amendments made by this section shall apply to taxable years beginning after December 31, 2003.
The new law will not let people deduct the actual amount of the state sales tax (which will be a logistics nightmare anyway -- imagine you need to save every single grocery shopping receipts to claim the benefit). The government will publish a state-by-state table (yes, to make the tax code even more complicated) that considers the adjusted gross income (AGI), filing status, number of dependents and local sales tax rate. It seems that I will not be able to deduct the sales tax I paid for my second car last weekend, but at least I should be able to come several hundred dollars ahead.
