Big spenders, start saving your receipts.
The recently passed American Jobs Creation Act of 2004 includes a provision that gives taxpayers who itemize deductions a choice: They can write off the state income taxes they pay, or they can choose to claim their sales taxes instead.
This new tax break was pushed by members of Congress in states without income taxes, who saw it as a way of getting their residents an added deduction. But it also has potential for big spenders in California, which has both relatively high sales tax and high income tax rates. The catch: To get any real mileage out of the deduction, taxpayers may need to maintain a shoe box full of receipts.
Clint Stretch, director of tax policy with Deloitte & Touche in Washington, said this provision would have the most effect in the seven states that either have no income tax or assess taxes only on dividends and interest.
"But someone in a state like California might want to consider this if they had low income but high wealth, so they found themselves buying a luxury car or boat in a year that they didn't pay a lot of income tax," he said.
For instance, a family of four with $50,000 in taxable income would pay $1,263 in California income taxes. The family, assuming it had fairly standard expenses, would be unlikely to have bought enough taxable goods to make the sales tax write-off worthwhile, said John Logan, senior state tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.
But not always. If this family decided to tap its savings to buy a $40,000 car, the situation would reverse. In Los Angeles County, the family would pay $3,300 in state and local sales taxes on that purchase alone. Add that to other taxable purchases, and the sales tax write-off is likely to be twice as valuable as the income tax deduction, Logan said.
In Illinois, where the income tax rate is relatively low but state and local sales taxes can exceed 8%, most families will benefit from writing off the sales tax rather than income taxes, Logan added.
Of course, individual circumstances vary, so taxpayers should look closely at their own situations before deciding which option to take and consult a tax advisor if necessary.
The sales tax deduction is a blast from the past, experts note. Twenty years ago, taxpayers were able to deduct both income taxes and sales taxes, so savvy taxpayers regularly kept track of their purchases. But the Tax Reform Act of 1986 eliminated write-offs for sales taxes.
