Many people overlook possible tax deductions when they file their income tax returns. One of the many deductions that people miss is the sales tax that was paid on a new or used car. This is a tricky deduction, however. You can claim sales tax paid or state income tax withheld, but not both on your income tax return. This deduction is not as beneficial in high income tax states like California and New York. Although, if you are fortunate enough to live in one of the seven states that do not charge their residents a state income tax, this deduction is a must have! The states that do not charge a state income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. The rest of the states are pretty close in their income tax withholding, so your tax savings will vary.
You must itemize your deductions in order to claim the sales tax you paid on your car purchase. If you file using only the standard deduction, you cannot claim the sales tax deduction. In order to claim the deductions, two things must be present:
• You itemize your deductions
• Your sales tax paid exceeds your state income tax withheld
You must also be able to produce a sales tax paid receipt to the IRS if you are audited. Make sure that you have all necessary paperwork to prove that amount and keep it in a safe place. Normally, you are not notified of an IRS audit until three years after you have filed your tax return. Furthermore, if you have purchased a car in the past, and want to adjust your previously filed income tax return, you may do so for up to three years after the filed date.
How Do I Know Which Deduction is the Best Choice?
The best tool to use to determine if you can use the sales tax deduction is at the IRS where they have a deduction calendar. There is a series of questions that the system will ask of you to determine your eligibility to claim your sales tax rather than your income tax due. It will take you approximately ten minutes to complete the survey. Before visiting the site, you will want to have the following items available to you:
* W2 form for the tax year you are working on
* Sales receipts showing sales tax paid for motor vehicle, boat, aircraft, or home
* Previous residential addresses for selected tax year
As always, if you are unsure, you should seek a tax professional for advice. The last day to file taxes for 2016 is April 17, 2017. Don’t wait to file until the last day, even if you owe the government tax money. You can complete the return and you will still have until April 17th to make your payment to the government without facing any penalties or fees. In addition, the IRS also allows payment plans in certain situations. In closing, if you need to file an extension, the final date to file your 2016 taxes is October 17, 2017. Keep in mind, even if you file an extension, penalties and fees still will apply if you owe taxes.