Overview of Sales Tax Deduction Options
The sales tax deduction keeps getting extended every couple of years. While most folks know they can claim their state and local income taxes as a deduction, others may not be aware that alternatively you can claim a deduction for sales tax paid if it is greater than the income taxes.
Obviously, folks that live in states with no income tax such as Florida and Texas will always opt to deduct sales tax paid. If you live in a state that imposes income and sales tax, you’ll have to make a decision to determine which deduction is greater.
Standard vs. Actual Sales Tax Deduction
The Internal Revenue Service offers tables based on family size and income level for each state that provides an automatic deduction for sales tax. Certain big-ticket items can be added to the table amount.
Alternatively, if you keep all your receipts, you can deduct actual sales tax paid during the year, including big-ticket items.
When Home Renovations Qualify for Deduction
IRS Publication 600 states that you can consider a home as a big-ticket item if any of the following apply:
• Your state or locality imposes a general sales tax directly on the sale of a home or on the cost of a substantial addition or major renovation.
• You purchased the materials to build a home or substantial addition or to perform a major renovation and paid the sales tax directly.
• Under your state law, your contractor is considered your agent in the construction of the home or substantial addition or the performance of a major renovation.
The contract must state that the contractor is authorized to act in your name and must follow your directions on construction decisions. In this case, you will be considered to have purchased any items subject to a sales tax and to have paid the sales tax directly.
Illinois Sales Tax Deduction on Home Renovations
Illinois residents considering or undergoing substantial home improvements should assess whether their renovation qualifies under these IRS guidelines. The ability to deduct sales tax on materials or renovations can significantly reduce your taxable income, especially when income tax deductions are less favorable.
Be sure to consult IRS Publication 600 and retain detailed documentation to support your deduction claim.
Frequently Asked Questions
What is the sales tax deduction and how does it work?
The sales tax deduction allows taxpayers to deduct either state and local income taxes or sales taxes on their federal tax return. You can choose the greater of the two, which benefits those living in states without income tax or those who made large purchases during the year.
When should I choose the sales tax deduction over the income tax deduction?
You should choose the sales tax deduction if you live in a state with no income tax, such as Florida or Texas, or if your sales tax payments exceeded your income tax payments due to significant purchases. Always compare both to determine the larger benefit.
Can I deduct the full amount of sales tax paid throughout the year?
Yes, if you keep receipts for all purchases, you can deduct the actual amount of sales tax paid, including on big-ticket items. Alternatively, the IRS provides an estimated deduction based on your income and family size, to which you can add tax on major purchases.
Are home renovations eligible for sales tax deduction?
Home renovations may qualify if you paid sales tax on materials or services under certain conditions, such as paying directly for the items or if your contractor is legally considered your agent per IRS rules. Documentation and a compliant contract are essential.
Does Illinois allow a sales tax deduction on home improvements?
Yes, Illinois residents may claim a deduction on sales tax for home renovations if they meet IRS criteria. This includes substantial renovations where materials were taxed and purchased directly or through an authorized contractor acting as your agent.