As the United States Congress debates whether to continue allowing taxpayers
to deduct the amount they pay in state sales taxes from their federal income
tax returns, an analysis from the Tax Foundation has found that states vary
widely in the number of individuals taking the deduction.
Those taxpayers who itemize deductions have the option
of deducting state and local taxes from their income. In doing so, each individual
taxpayer must decide to deduct either the income tax withheld from his or her
wages, or the total sales tax he or she paid during the tax year.
While the option of deducting sales taxes expired on December 31, 2011, it
may be renewed by Congress in order to be in effect for 2012. If the provision
is not extended by Congress, sales taxes on purchases in 2012 will not be deductible,
but tax paid on purchases made in 2011 will continue to be for returns filed
this year.
Individuals who choose to deduct sales taxes have the additional option of
reporting the exact amount (if they saved all their receipts) or using an estimate
from the Internal Revenue Service that depends on their state and their income
level.
States vary widely in the percentage of taxpayers who use each deduction, with
the greatest impact seen in states that have a very low or no state income tax.
In general, more taxpayers elect to deduct income taxes than sales taxes. However,
as one might expect, states that have no (or low) income taxes tend to see most
taxpayers deducting sales taxes instead.
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming
are all states in which over half of the taxpayers elect to deduct state and
local sales taxes, rather than income taxes, on their federal return, and these
are all states that have either a very limited income tax (in the case of Tennessee)
or no income tax at all.
As the option to deduct sales tax, rather than income tax, is the temporary
provision that must be extended each year, taxpayers in those states therefore
have the most to lose should this option not be extended for a further year.
LAWANDTAX-NEWS.COM
