Deducting sales tax for big savings

As mentioned in yesterday’s post, one of the benefits of the massive $700 billion bailout was an extension of a bill that allows taxpayers to deduct either sales tax paid or state income taxes in both 2008 and 2009.

Since I live in a state with no state income tax, I was thrilled about the possibility of deducting several thousand dollars in sales taxes should I decide to purchase a new car in 2009.

But what about 2008? I didn’t buy any big ticket items but I know for certain I paid my share of sales taxes. Unfortunately, I’ve never been great at saving all my receipts so how could I a) come up with an accurate amount to claim on my taxes and b) prove it should the IRS contest the amount I pulled out of my arse?

After doing some digging, I found out the IRS doesn’t expect all of us to be master packrats, saving every receipt that shows a sales tax charge throughout the year. Instead, they offer a calculator on their website that takes your income, zip code and a few other factors to calculate the assumed amount of sales taxes you paid.

To access the calculator, visit the IRS website and type in the search box “Sales Tax Deduction Calculator.” Click on the resulting link, enter a few details and viola, you have your suggested (a.k.a. defendable should the IRS question it) deduction amount.

Things you’ll need for this exercise:

• W-2 forms for 2008
• Sales receipts showing sales tax paid for specified add-on items (i.e. car, motor home)
• All of your residential addresses for 2008

When I guessed a number initially, I estimated I’d spent $1,000 in taxes in 2008. The amount the calculator generated based on my income and local tax rate? $867. How much this saves me on my taxes? $232. Heck yeah!

Sure, there’s a difference between the two numbers and I might have been able to deduct a lot more if I’d kept all my receipts. But seriously, not having to live surrounded by piles of receipts is well worth any money I’m potentially leaving on the table.

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