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Deduct State Sales Tax On Your IRS Federal Taxes

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    Deduct State Sales Tax On Your IRS Federal Taxes

    While the the 2004 American Jobs Creation Bill mainly deals with business taxes, it also includes a potential tax break for individuals. The bill allows individuals who file a tax return with itemized deductions (Schedule A) to deduct their state and local sales tax on both their 2004 and 2005 tax returns.

    The important factor to understand is that for most people this new option will involve a choice. The new law says that you now must choose between deducting your state income taxes (which previously existed) OR state and local sales taxes you paid, but not both. For those living in Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming the choice is easy since they don't have state taxes. Those living in the other 43 states, however, will have to figure out which of the two ends up being most beneficial.

    There are a couple of ways that individuals can determine their the amount of sales tax they can deduct. The first option is to claim the total of the sales taxes your actually paid based on the amounts shown on your receipts. If you are well organized and already keep this information, there should not be a problem figuring out this total and having the documentation to support your numbers in case the Internal Revenue Service (IRS) inquires.

    The problem with the actual paid amount (at least for 2004) is that most people don't keep all their sales receipts. Since this law was written in October this year, even if you begin saving all your receipts now, you still have 10 months where you're unlikely to have sales tax documentation. That will mean that most people will opt for the second calculation option.

    As part of the new law, the U.S. Treasury through the IRS has created <A HREF="">standard sales tax tables</A> that will give you a specific dollar amount that you can deduct for each state. These tables will take into account a number of factors to arrive at a dollar amount for you including overall taxpayers average consumption, your filing status, the number of dependents you have, your adjusted gross income and your state's (and local) sales tax rates.

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    While the tables will likely be the easier method to use to get the sales tax number, you'll want to take a hard look at your particular buying habits before using this as a default. If you think that you spend quite a bit more than the average person, taking the time to recreate your spending (and keeping good records in 2005) is in your best interest. For example, if you recently redecorated or added to your house, have expensive prescriptions or recently had a new addition to your family, you probably spent more than the average person.

    For those who have made large item purchases, there is also a hybrid method that can be used to calculate the sales tax deduction. For expensive items such as cars and boats, taxpayers can claim the sales tax on these items in addition to the standard table sales tax deduction. More items over a certain dollar amount are likely to be added to this list since the law's language allows the Treasury Secretary to designate other items which he feels appropriately fall under the add-on deduction.

    While the sales tax deduction isn't a perfect tax break for most of us, it will be beneficial to people in certain states and who have circumstances where they spend more than the average person.