NOTE: This post was updated Dec. 20, 2017.
Are you looking for a new ride? Buying a car at the end of the year often means you'll pay less, as dealerships are ready to bargain in order to clear their lots for the new year and new models.
Driving away in new wheels by Dec. 31 also could give you a bigger sales tax deduction when you file your taxes next year.
This is particularly true for 2017, which thanks to the new tax law approved by Congress on Dec. 20, 2017, is the last year that many taxpayers will be able to take advantage of the state and local sales tax deduction.
Itemized sales tax savings: If you itemize, you can claim either the state and local income tax or the state and local sales taxes you paid during the year as a tax deduction.
Sorry, you can't take both. You've got to choose.
Most taxpayers who use Schedule A pick income taxes because most states have those levies. Only seven states -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- have no personal income tax. New Hampshire and Tennessee (for a few more years) tax only interest and dividend income.
But even if you do pay state income tax, if you're in a lower income bracket or your state has a low flat rate, such Pennsylvania where it's a flat 3.07 percent for all taxpayers, then it's at least worth running the numbers to see if it's better to claim the sales tax deduction.
If so, there's even better news. You can boost your sales tax deduction by making a taxable big ticket purchase.
Here's the scoop on how it works.
Average sales tax amount: You can keep all the receipts on all the things you purchased during the year, add the sales tax amounts and claim that total.
I did that one year. Just one year. I didn't realize I bought so much stuff! It was a mess hanging onto all those sales slips and a bigger hassle tallying them.
So the next year, I used the average sales tax amount from the table the Internal Revenue Service provides for each state in the Schedule A instructions. There you'll find your state, then look for where your income range and exemption amounts meet in the table. The 2016 table tells me that our state sales tax deduction amount will be around $1,200.
But wait, there's more!
The Schedule A state tables use only the state's general sales tax rate. So if you live and regularly buy in a city or county (or both) that also collects an added tax on your purchases, you'll need to figure that amount, too.
The IRS offers a worksheet -- the State and Local General Sales Tax Deduction Worksheet, also in the Schedule A instructions -- for this task. Or you can go to the IRS' online sales tax calculator. Or if you use tax preparation software, it should figure this amount for you.
The IRS calculator still has the 2015 data, but it should be updated by the time filing season opens on Jan. 23, 2017. But for illustrative purposes, using last year's data the calculator figured I could add another $400 in local sales taxes to my Schedule A deduction amount.
But wait, there's even more! This is where the major purchase comes into tax deduction play.
What's big? The IRS state and local worksheet, as well as the online calculator, also instructs you to "Enter your state and local general sales taxes paid on specified items, if any."
This is where you count the sales tax on major purchases. And what does the IRS accept here? The following are sales tax deductible big-ticket items:
- A motor vehicle, including a car, motorcycle, motor home, recreational vehicle, sport utility vehicle, truck, van and off-road vehicle;
- An aircraft or boat, if the tax rate was the same as the general sales tax rate;
- A home, including a mobile home or prefabricated home, or a substantial addition to or major renovation of a home, but only if the tax rate was the same as the general sales tax rate.
Note these exceptions: There are a few other considerations, however, before you can claim the sales tax amount on your major purchase.
In most cases, in order to deduct the sales tax as an itemized expense, it must the same as the general sales tax rate.
But -- and there's always a "but" or two when it comes to taxes! -- the sales tax on motor vehicles are deductible even if the tax rate was less than the general sales tax rate.
What if the auto (or RV or etc.) tax was more than your state rate? The IRS says that in this case, you can deduct only the amount of tax that you would have paid at the general sales tax rate on the vehicle.
As for the home-related sales taxes you can count, the IRS says the deduction is allowed if your state or locality imposes a general sales tax directly on the sale of a home or on the cost of a substantial addition or major renovation.
You also can count the sales tax paid on materials you purchased to build a home or substantial addition or to perform a major renovation and paid the sales tax directly.
If you're not the do-it-yourself kind and had a contractor do the work, that person is considered your agent in the construction of or substantial addition to your home, meaning you will be considered to have purchased any items subject to a sales tax and to have paid the sales tax directly. To make things easier for you in case the IRS asks, have your builder list the materials tax amount on a separate line in your final statement.
A few final details: Remember, allowable deductible big-ticket buys are those for personal use only. Don't include sales taxes paid on items used in your trade or business.
And to substantiate the sales tax paid on these specified items, the IRS says you must keep your actual receipts showing general sales taxes paid.
So if you're planning on buying a car and you itemize your tax deductions, then head to your local car lot sooner rather than later.
Your new vehicle will be a great Christmas present for yourself, as well as a tax gift (like these 12 more tax moves to make by Dec. 31) when you file your return next year.
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