Is the State Sales Tax Deduction a Better Alternative for You?

Here’s a tax-related post from Suze Orman that highlights some facts around the deductibility of state sales taxes on your federal income taxes. The details:

According to a recent government study, an estimated 2.1 million taxpayers didn’t take advantage of a valuable tax deduction last year: the ability to deduct either state income tax or state sales tax from a federal tax return. If you happen to live in one of the seven states that doesn’t levy income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no income tax, while New Hampshire and Tennessee tax only dividend and interest income), it makes tremendous sense to file an itemized return and deduct state sales tax paid.

Even if you live in a state with a low income tax rate, I’d urge you to at least compare your potential savings from claiming the sales tax deduction rather than the income tax break. Of people who did claim the sales tax deduction, the average deduction last year was $1,718. That’s a big savings.

As Suze notes, unless Congress extends the sales tax deduction option, it’ll disappear after Dec. 31, 2007. That said, you may want to calculate your 2007 returns both ways — comparing the sales tax deduction to your state income tax — and see if you’d be better off financially claiming the state sales tax.

For me, the income tax in Michigan is at a pretty good level and I have a decent income, so I’d really have to buy a lot in a year to beat the cost of my state income tax. That said, it’s something my accountant always looks at just in case.

From:http://www.freemoneyfinance.com/