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Key takeaways:
- Reduce your tax bill by deducting either state and local income taxes or state and local sales taxes.
- To claim the sales tax deduction, itemize your deductions on Schedule A. Compare it to the standard deduction to see which gives you the better tax break.
- The total amount you can deduct for state and local taxes, including sales tax, is capped at $10,000.
- Sole proprietors, single-member LLCs, and multi-member LLCs also face the $10,000 SALT cap—except for C corporations, which aren’t subject to this cap.
- Not sure if you should take the standard deduction or itemize? When you file with Bench, your tax preparer will run the numbers both ways to see which saves you more money and do the filing for you.
What is a sales tax deduction?
A sales tax deduction lets you lower your tax bill by subtracting the sales tax you’ve paid throughout the year. It’s part of the state and local tax (SALT) deduction, which helps reduce what you owe in federal taxes. What it means is taxpayers can write off some of the sales or income taxes you’ve already paid to your state or local government.
Before you start, knowing the ins and outs can make this deduction work in your favor.
How a sales tax deduction works
When you’re filing your income tax return, you have two options for deductions:
- State and local sales taxes
- State and local income taxes
The catch is you have to pick one or the other. Here’s a breakdown of how each one works.
State and local sales taxes
You can deduct every penny of sales tax you paid, provided you’ve kept all your receipts (though it’s not the easiest task). For a simpler approach, the IRS offers a sales tax worksheet or sales tax deduction calculator to estimate your total when tracking receipts feels overwhelming.
State and local income taxes
To report your state and local income taxes, here’s what can count towards it:
- Any estimated taxes you send to state or local governments during the year.
- State and local income taxes taken from your paycheck.
- Income taxes you paid this year that were for a previous year.
- Mandatory contributions to state benefit funds (like unemployment insurance). This is only applicable in some states.
Either way, both sales and income tax deductions can reduce your taxable income on your federal tax return. As mentioned above, you can only claim one deduction, not both.
Who should deduct sales tax?
It makes sense to deduct sales tax if you live in a state that doesn’t have income tax (like Alaska, Florida, Nevada, and New Hampshire, to name a few) or you bought a big-ticket item, like a boat or car. When your sales tax estimate is higher than your income tax, you could keep more of your hard-earned money.
California, Hawaii, New York, New Jersey, and Washington D.C. all have income tax rates above 10%. If you reside in one of those states, it may be more advantageous to deduct income tax instead of sales tax.
The $10,000 SALT cap
When you file state and local taxes, there's a limit on how much you can deduct. Thanks to the Tax Cuts and Jobs Act of 2017, the total deduction for state and local taxes, including sales and property taxes, is capped at $10,000. It’s $5,000 if you’re married and filing separately. Any resident living in a high-tax state or owning property in an area with steep property taxes might hit this cap quickly.
Next, let’s see how this can impact you as a business owner.
Is sales tax deductible for a business?
Yes, but the rules are different if you own a business. Sole proprietors, single-member LLCs, and multi-member LLCs face the $10,000 SALT deduction cap. However, C corporations aren’t subject to this cap. Those businesses can deduct all sales tax expenses as regular business expenses without worrying about the limit. The SALT deduction cap will expire on December 31, 2025, so be sure to stay updated on future changes that might impact your tax strategy.
Standard deduction vs itemized deductions
With all this information, you’re probably curious if you should take the standard deduction or itemize. It really all comes down to your personal tax situation. With a standard deduction, tax filers can claim a set tax deduction amount without adding up their deductible expenses.
The majority of taxpayers—around 90%—opt for the standard deduction because, in most cases, it provides a larger tax break.
For the 2024 tax year, the standard deduction is $14,600 for single filers, up from $13,850 in 2023. It increases to $21,900 for heads of households and $29,200 for married couples who file jointly.
The alternative is itemizing, in which you list all your eligible expenses individually to see if they total more than your standard deduction. They include medical and dental expenses, state and local taxes, mortgage interest, donations to charities, and casualty and theft losses from a federally declared disaster.
When your itemized deductions exceed the standard deduction for your filing status, you'll want to itemize. In other cases, selecting the standard deduction is the smarter choice.
How to claim a sales tax deduction
There are two main approaches you can take to claim the sales tax deduction.
1. Add up the total sales tax from your receipts
- Did you buy big items this year, like a car, a boat, or new appliances? What about home renovations? Keep those receipts handy as they’ll show how much sales tax you paid.
- Total up the sales tax from your receipts.
- Claim the total on Schedule A of Form 1040 under “State and local income taxes” (on Line 5a), and check the box for “Sales tax.”
2. Use the IRS calculator
Losing track of your tax receipts doesn’t mean you're out of options. The IRS offers a calculator that estimates your sales tax deduction based on your income and where you live. Here’s how it works:
- Enter your details, like your income, family size, and where you live, into the IRS calculator.
- Answer a few questions, such as details about moving or changes to your local tax rate. For example, moving from Arizona to Nevada mid-year will prompt the calculator to adjust for the two different state tax rates.
- Claim the estimated total on Line 5a of Schedule A, and check the box for “Sales tax.”
Make tax deductions easier with Bench
Deciding between the standard deduction and itemizing can take time, effort, and patience. Our Bench tax professionals can crunch the numbers for you, find every deduction you’re eligible for—including sales tax deductions—and show you which method offers the best chance to take your tax bill down a notch.
