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Sales Tax Deduction Details Released

Contributed by mm | December 18, 2004 2:12 AM PST

Back in October, I reported that in 2004 and 2005, people can claim state sales tax deduction form their federal income tax forms. This new law especially benefits those who live in the states of no state income tax, namely Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. One of the remaining questions, as I mentioned in this November post, is how should people calculate the deduction amount, assuming only a small handful of people have the fortune-telling capability to keep full year's receipts for this purpose.

Yesterday, IRS finally announced the availability of sales tax deduction table. The accompanying Publication 600 (PDF) includes tables for all states plus instructions on how to use the table.

Below is my quick number-crunching on how this affects me:

1. In IRS 600, I look for the table for state of Washington.

2. I anticpate our household total income will be between $120,000 to $140,000. We will also claim three exemptions (my wife, my son and I). The table indicates a deduction of $1,201.

3. Now, the IRS table does not take into account the local sales tax beyond what the state collects. It does provide adjustments. Using State of Washington's online tool, my city's 8.8% sales tax rate actually includes 6.5% state tax, 1.9% local city/county tax and 0.4% regional transit authority assessment for a total of 8.8%. According to the worksheet in IRS 600, I can uplift my deduction to $1,201 / 6.5% * 8.8% = $1,626.

4. According to the rules, I can also deduct my sales tax payout during my Kia purchase. It amounts to $8,150 * 8.8% = $717. (Note the sales tax on the car is actually 9.1%, but the rule only allows deduction up to general sales tax rate.)

5. All in all, I can deduct $1,626 + $717 = $2,343. At 25% tax bracket, this removes $586 from my 2004 tax liability. Not bad at all!

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