TAX PREP

Sales tax deduction

We constantly have to make tough choices with our money. That’s true even at tax time, when the IRS’s sales tax deduction presents this peculiar choice to people who itemize: You can deduct the state and local general sales tax you paid during the year, or you can deduct the state, local and foreign income tax you paid during the year. You can’t do both. And in the 2018 tax year, there’s a $10,000 cap.

Here’s how the situation works and how you can tell which deduction is better for you.

WHAT’S DEDUCTIBLE FOR TAX YEAR 2018

State and local general sales taxes generally include either:

• Your actual sales tax expense on purchases, which can mean meticulous record-keeping

• An estimate of what you paid, which you can calculate using the IRS’s sales tax worksheet and tables at apps.irs.gov/ app/stdc.

State, local and foreign income taxes generally include:

• State and local income taxes withheld from your wages

• Estimated income taxes you paid to state or local governments during the year

• State and local income taxes you paid during the year that were actually for a prior year

• Foreign income taxes imposed on you by a foreign country or U.S. possession

• Mandatory contributions to state benefit funds that protect against lost wages (certain states only)

HOW TO DECIDE WHICH DEDUCTION TO TAKE

Compare what you paid in sales tax for the year to what you paid in state, local and foreign income tax for the year. Then deduct the larger of the two amounts.

Reid Riker, a certified public accountant at Evans, Nelson & Company in Reno, Nevada, says these things can speed up the decision:

• Look at where you live. If you live in a state that doesn’t have a sales tax, then the income tax deduction is probably for you. The same goes for people in high income-tax states: “By and large, for most large-income earners in states such as California or New York or other states that have state income tax, you usually find that it’s better for folks to take the state income tax deduction because it’s usually larger,” Riker says. Conversely, if you live in a state with no income tax, the sales tax deduction will probably be the better choice.

• Reflect on your life. Sounds serious, but all this means is that if you recently made some big purchases — new appliances, a car, travel or lots of furniture, for example — you may have paid a lot of sales tax during the year. That could easily swing the pendulum in favor of taking the sales tax deduction. Likewise, if you started making a lot more money, you may have paid a lot more state income tax during the year, which means deducting your state and local income taxes might be the better choice.

• Beware the new catch. Starting in 2018, all state and local tax deductions are capped at $10,000. That includes property tax. So if you’ve been itemizing your tax return and you live in a state with high income taxes or you own a house in an area with high property taxes, there may not be much room for this deduction.

By Tina Orem, NerdWallet.com