Tax Tip No. 5: Boost State Sales Tax Deductions

This may be the last year that taxpayers who itemize get to choose between deducting their state income taxes or their state sales taxes on their federal tax return. Unless Congress acts, the either-or-state-tax break will expire at the end of the year. In the meantime, if you plan to deduct your sales taxes, buying a big ticket item like a car or a boat before the end of the year can substantially boost your deduction.

For most taxpayers, the state income tax provides a larger deduction. But for residents of states that don't have an income tax, such as Texas or Florida, the sales tax deduction is an easy choice.

You can save your receipts or use the IRS's state-specific tables to estimate your sales tax based on your family's size and income. In either case, you can add the sales tax for major purchases like a car or boat to boost your tally.

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Just think, if you buy an energy-efficient hybrid car before the end of the year, you'll qualify a sales tax deduction and an energy tax credit of up to $3,000, depending on the make and model. But shop carefully. The tax credit for the most popular Toyota hybrids has already been exhausted.

Return to: 15 Year-End Tax Moves