It's tax season again! I started the annual chore of collecting tax forms and piecing together information over the past weekend. Happily being a bean counter, I plan to share some personal experience of tax preparation in coming weeks.
Today I'd like to discuss sales tax deduction. Sales deduction was allowed starting in tax year 2004. (Back then, PFBlog covered the topic in many posts here, here and here.) It allows taxpayers in certain states to take itemized deduction for sales tax they incur.
One can generally consult the IRS Sales Tax Deduction Calculator for the task (unfortunately, as of today, the calculator hasn't been updated with 2013 tax year information yet), and the calculation is also embedded in most tax preparation software, like TaxAct which I use.
For most people who don't have the habit of collect receipts, IRS provides a simplified way to estimate your annual sales tax payment based on your income and number of exemptions taken. TaxAct reported that we can claim $3,215 under this category.
On top of that, tax law allows you to take extra sales tax deduction for spending on 1) motor vehicle, 2) aircraft or boat, and 3) home or major renovation of home. For us, 2013 is a year where we bought another car and spent quite some money on home improvement projects. Fortunately, I kept receipts for big purchases like these, and the sales tax on these receipts sums up to $5,889.
The total of over $9,000 is a pretty sizable deduction indeed!
On the flip side though, sales tax deduction, along with many other items, is not eligible for deduction in the alternative minimum tax (AMT) calculation, so it is yet to be seen whether, or by how much, I can recoup some of these sales tax payments.
The quick exercise over sales tax deduction makes me wonder: is it worthwhile to keep receipts in order to claim a higher sales tax deduction next year?
Some quick calculation: excluding the vehicle purchase and home improvement project spending, we spent about $50K in local sales-tax-bearing purchases last year. At a 9% sales tax rate, that's about $4,500 in sales tax paid. Had we saved all our receipts, we would have been able to claim $1,300 more sales tax deduction. Assuming no AMT implication, this $1,300 additional deduction, at our 28% marginal federal tax rate, would be worth $364. Not a small sum, but not a big sum either.
Is it worth the efforts? I'm not sure. For the new year, my wife and I plan to do a small experiment for a couple of month. We will stash our receipts in a central place, and hire our son at month end to add up the total sales tax paid on these receipts. Probably in a couple months' time, we will be able to know if it will pay off. At the very least, our son will benefit from some extra math exercise :-)