A Tax Tip – for Schedule A deductions: THE SALES TAX DEDUCTION By Christina Mae Olson, CFP®
How do you decide if you should complete Schedule A when you complete your tax return? Come on – don’t stop reading now. Even if you pay someone else to do your taxes – it’s important that you know this stuff. Some of the best tax preparers make simple mistakes.
The decision to itemize your deductions is simple. In 2006, if you have qualifying deductions that total more than $5150 then you should itemize. $5150 is the standard deduction – the “gimmee” deduction for single filers. It goes up a tad every year – up to $5350 in 2007. If you have less than $5150 in deductions then you won’t benefit from itemizing. Most of my readers are not able to marry – but just in case a legally “married filing jointly” filer wants to know – your standard deduction is $10,300 for 2006 – going up to $10,700 in 2007.
Are you an “itemizer?” You can deduct things like real estate taxes, home mortgage interest and charitable contributions. Do you have medical expenses that total more than 7.5% of your income? These are deductible. You can also deduct on Schedule A certain expenses that total more than 2% of your income (these are the so-called “miscellaneous deductions”) like safety deposit box rental costs, investment fees and unreimbursed employee expenses. You can download Form 529 from www.irs.gov for a complete list.
Did you know that we’ve been able to deduct our state income taxes from our federal income tax liability? The IRS has allowed this provision for years for those of us who itemize our deductions on Schedule A.
ATTENTION: Wait, wait! Don’t submit your 2006 tax return until you read this next part. In December of 2006 – congress reinstated a deduction for state and local sales taxes. Yes, SALES TAX. In many parts of Wisconsin and Minnesota – sales taxes can be 5.5% or more. You would have paid $1375 sales tax on a $25,000 auto purchase. Is that more than the state income tax you paid? Probably. Did you buy some big ticket items last year? If you did – you are now able to deduct the sales tax you paid from your income taxes.
You can only deduct your state income tax OR your sales tax on Schedule A. Not both. You’ll need to add up all your sales taxes and see if that is more for you.
Here’s the wacky part: this provision wasn’t approved until after the IRS printed the tax return forms. You won’t find a space for the sales tax deduction anywhere on Schedule A. Publication 600 (www.irs.gov) tells you to write in ST (for sales tax) on Line 5 of Schedule A and fill in the amount.
You may think I’m crazy to hope you have saved all your receipts and can actually determine the sales tax you paid in all of 2006. I’m not crazy – but – if you don’t know for sure you can use a free and anonymous tool at www.irs.gov to help you calculate an estimate for you. Search for Sales Tax Calculator at their home page. It’s worth it for you to do this because you might get a bigger deduction (higher return) if your sales tax obligation was higher than your state income tax.
Oh, one more thing. We all get to claim a credit for that elusive telephone excise tax that was added to our phone bills for years. This is a credit not a deduction. No Schedule A needed. You can take a standard credit of $30 or actually total up the pennies and nickels from your old phone bills from March, 2003 to July, 2006. Yup. It’s that simple. Form 8913 tells you how – the amount you claim is an actual credit that reduces your taxes dollar for dollar. Every penny counts, right? It does in my book.
Chris Olson is a Certified Financial Planner™ practitioner with a fee-only private practice. You can reach her at 608-525-9818 or CMOney@centurytel.net.