Bellevue & Redmond, WA Income Tax Preparation Services: Stephen Nelson, CPA

Maximizing the Washington State Sales Tax Income Tax Deduction

In 2004, 2005 and 2006, the sales tax that Washington state residents pay can be claimed as an income tax deduction if the taxpayer itemizes his or her deductions. Let me explain how the deduction works, identify the mistake that most taxpayers will probably make in claiming the deduction, and identify some tricks for easily maximizing the value of the deduction.

How the sales tax deduction works

The sales tax deduction works this way. You can either tally up the actual sales taxes you paid over the year (by adding up the sales tax amount shown on all your receipts). Or you can look up a default sales tax amount the IRS presumes you paid over the year in a table that comes with the 1040 preparation instructions.

There's a wrinkle, though, if you look the sales tax deduction in the IRS-provided table. The tables don't include sales tax that you paid on vehicles or home building materials purchased during the year. Therefore, you can add any sales tax you paid on a vehicle purchase to the amount you look up the table. You can also add any sales tax you paid on home building materials.

A Common Mistake

Okay, so far so good. But there's a problem with the way the IRS calculates and compiles the numbers shown in the table. The IRS only knows the general Washington state sales tax rate (6.5%) not the combined state and local rate. And the local rate may add another 2% roughly to the rate you actually.

Therefore, you get to add an additional amount for any local sales tax you paid to the value you look up the table. And this is an important step because almost a quarter of the sales taxes that Washington residents pay are local sales taxes.

For example, if the IRS table says you can get an automatic $650 deduction (because of the 6.5% general state sales tax) and you live in Redmond, Bellevue, Kirkland, Sammamish or just about anywhere on the eastside of Lake Washington, you actually get to add another $230 to the deduction amount (because of the 2.3% of local sales taxes you pay).

Tips for Maximizing the Deduction's Value

And now a couple of tips for maximizing your state sales tax deduction. While it probably isn't worth it (at least in my mind) to collect a bazillion receipts over the course of the year in order to boost your sales tax deduction, you should be aware that the IRS assumes you're spending less than 20% of your adjusted gross income (AGI) on items subject to sales tax.

This "less than 20% of AGI" assumption means that in any year in which you're making major purchases subject to sales, you'll almost certainly easily get a larger sales tax deduction than the IRS tables allow even if all you do is take the sales tax deduction on the major purchase.

This "less than 20% of AGI" assumption also means that if you have significant amounts of tax-exempt income (such as from municipal bonds or Social Society benefits) that you're almost surely paying way, way more in state sales tax than the table "guesses."

If you have further questions about how to maximize the value of the new Washington state sales tax deduction and you're a client, be sure to ask me about this when I do your return. The extra tax savings you gain from us handling this deduction right could easily save you a few hundred dollars each year.

Related Topics: