Sales tax deduction a bonus this year
By HELEN HUNTLEY
Published January 23, 2005
The hottest news this tax season is a new sales tax deduction that will benefit Floridians who itemize deductions. Some will be able to shave hundreds of dollars from their tax bills.
The new deduction, which applies to 2004 and 2005 returns, was an election-year gift to taxpayers in Florida and six other states that have no income tax. The rest of the nation won't get much benefit because taxpayers have to choose between the new sales tax deduction and the existing state income tax deduction; they don't get both.
"It's not meant to be a huge tax saver for individuals, but it will give you a little bit more than you would have had," said Mark Steber, vice president of tax resources for Jackson Hewitt, a tax preparation chain.
The deduction can be based on actual sales tax expenditures, but since Congress didn't pass the law until the year was nearly over, taxpayers didn't know to save their receipts. The alternative, which most people are expected to use, is to determine your deduction from an IRS table based on family income and the number of people you claim as exemptions on your tax return.
The IRS uses a generous definition of income, including nontaxable income such as interest on municipal bonds, welfare payments and the nontaxable portion of pension or annuity payments and Social Security.
However, the deduction amounts aren't particularly generous. Those in the Florida table range from $394 to $2,073.
"I thought they were disappointing," said Tampa accountant Greg Rosica of Ernst & Young.
Residents in counties with sales tax rates higher than 6 percent can deduct a little extra, but they face some tricky calculations to come up with the correct amount. The worksheet the IRS provides for this process is confusing to follow - even for some IRS workers.
Two key things to know if you are completing a worksheet are your state sales tax rate (6 percent in Florida) and your local sales tax rate, which in Florida is the difference between 6 percent and the rate merchants charge in your county.
Taxpayers who paid sales tax to buy or lease a motor vehicle or to buy building materials can deduct those taxes in addition to the amount derived from the table.
If you lived in two or more places with differing sales tax rates during the year, the IRS says to prorate the tax deduction based on the number of days spent in each place.
If you think you spend more on sales tax than the table allows you to deduct, start saving receipts now to use on next year's return. St. Petersburg accountant Celia Hall says taxpayers who use money management software to track their spending might want to set it up to keep tabs on sales taxes paid.
Don't get too accustomed to the deduction, however. It is scheduled to disappear in 2006 unless Congress decides to extend it.
[Last modified January 23, 2005, 00:13:14]
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