In this election year, one of the most important decisions will be made on your 2015 tax return. You must determine whether it is better to deduct state and local income taxes paid last year or to claim a deduction for state and local sales taxes. What’s at stake? Tax dollars.
The optional sales tax deduction officially expired after 2014. But the new Protecting Americans from Tax Hikes (PATH) Act of 2015 revives the deduction retroactive to 2015 and makes it permanent.
For many taxpayers, particularly those residing in states where income taxes are relatively high, state and local income taxes will produce a bigger deduction. However, for other taxpayers, the sales tax deduction may be preferable, especially if you purchased certain big-ticket items last year.
Background: The optional sales tax deduction expired and was reinstated several times in the past. But the PATH Act removes the uncertainty. Beginning with the 2015 tax year, this deduction will be available on your personal tax return.
Note that both state and local income taxes and state and local sales taxes are claimed as itemized deductions. Such deductions are subject to a reduction for certain upper-income taxpayers on their 2015 returns.
If you elect to deduct sales tax on your return, you can choose one of two methods. With the first method, you deduct the actual amount of sales tax paid in 2015, based on the receipts you have. Although this method will often provide a bigger overall deduction than the second method, it requires diligent recordkeeping.
With the second method, which is simplified and less time-consuming, you are entitled to deduct an amount based on a special table prepared by the IRS. The table provides a specific amount for each state based on the size of your family. Icing on the cake: In addition to the amount listed for your state on the IRS table, you can increase your sales tax deduction by the amount of sales tax paid on
• the purchase or lease of a vehicle.
• the purchase of a boat or aircraft.
• the purchase or substantial addition to or renovation of a home.
Thus, even if you are using the simplified method for a sales tax deduction, it is beneficial to keep records for these big-ticket items.
Finally, other special rules may come into play if you are filing separately as a married person. If both spouses itemize deductions, both must claim either the state and local income tax deduction or the sales tax deduction on their 2015 returns.
These options may require in-depth analysis. Do not assume you are always better off with one option. Have the numbers crunched to determine the best choice for your situation.