My Personal Finance Journey

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State Sales Tax Deduction Closer to Reality

Contributed by mm | October 9, 2004 12:31 PM PST

Back in June, I wrote about a bill passed by the House that allows deduction of state sales tax in federal tax returns. Apparently that bill failed in Senate last time, but now the same state sales tax deduction clause has been added into a major overhaul of corporate tax bill, which has passed in the House and is expected to clear Senate very soon. This is especially good news for people living in the state of Washington, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming -- all of these states have no state income tax.

For details about the tax break, CCH provided a brief summary about the tax bill (see State Sales Tax Deduction on page 4). TheOlympian also published an informative Q&A. In short:

- The state sales tax deduction break is approved for two years only: tax year 2004 and tax year 2005
- Taxpayers can elect to deduct either state and local income tax, or state sales tax (that's why this tax break is primarily for the seven no-income-tax states)
- The tax break is only available for people using itemized deductions
- Taxpayers can determine the deduction amount by adding up all receipts (which sounds like a mission impossible) or using a table prepared by the Secretary of Treasury that is based on filing status, number of dependents, adjusted gross income and state and local tax rate.

Several resources estimate that this tax break can be worth $300 to $500 for a typical family with four who uses itemized deduction. In addition, at least one source says sales tax from car purchases can be added to the top of the number indicated by the tax table. This can be an additional $200 for me who added another set of wheel to the family earlier this year.

Now here is the most ironic part of the story. According to CCH: "Congress realized that it was imposing a burden by ordering the creation of these tables so close to the end of the year and the beginning of filing season. As a result, the conference report indicates that conferees dont expect the Treasury to have the tables ready before the 2005 filing season. What estimates will be allowed for 2004 returns without these table remains to be seen."

So it is still a possibility that we will walk into the tax season without knowing all the rules of the game. You will not appreciate this kind of thing especially when you file your tax return by yourself like I do.

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