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Taxes – US sales tax Tax time is just around the corner, and it is time to start planning. Obviously, you want to organize your finances to lower your taxes as much as possible. Fortunately, the government has given you a great new way to potentially lower your federal taxes. You now have the opportunity to claim your state sales tax to lower your taxable income on your federal tax return. Have you always been able to deduct your sales tax in the US? While the ability to write off the amounts you paid in state sales tax was formerly available when paying your US income tax, it was taken off the books by Congress in the Tax Reform Act of 1986. When you are preparing your 2006 deductions, it is important to realize that the sales tax deduction is back. Depending on where you live in the US and your specific circumstances, this could result in big savings. Should you deduct your state income tax or state sales tax? When faced with filling in your US tax forms, the simplest method is always to take the pre-determined deductions. The IRS will, based on your filling state and income level, give you the option of just choosing a pre-determined deduction from your taxable income. The IRS reports that most people simply chose the pre-determined number – as many as 66% of all tax payers take the easy way out. And of course, for some people the pre-determined numbers will be the best option for them. For many others, however, they will take the pre-determined numbers for the sake of simplicity. Well, if you have always taken the easy route just for the sake of simplicity, it is time to rethink your tax filing practices. If you forgo the pre-determined calculation and choose to itemize your deductions, you can now decide if you want to deduct your state income tax or your state sales tax. This is significant to the amount of money you end up paying. It will be particularly significant if you live in one of the few states - Tennessee, Florida, Wyoming, Washington South Dakota, Texas, and Nevada – where there is no state income tax. Previously, residents of these states could not claim any state tax exemption. Thanks to the new rules, residents of these states can now claim their state sales tax to reduce their taxable income on their US tax forms. Even if you are a zealous record keeper, and have a receipt for every single purchase you made where you paid sales tax, you will still likely be better off choosing to deduct your state income tax – the fact is, you likely will just not have paid enough in sales tax. However, if you have made some significant purchases – such as a car, a boat, an airplane, luxury items or a major event such as a wedding – the sales tax you paid last year could be more than you paid in state income taxes. Planning ahead In order to considering using this exciting deduction option, the key is to keep yourself prepared throughout the year. Make sure you hold on to receipts for your big ticket items, and resist the urge to take the easy way out come tax time. If you have paid a lot of state sales tax in the US, you could be paying less income tax at tax time. |
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