Sales Tax Deduction Interesting Rabbit Hole

[Neill]

While looking at my 2016 taxes I noticed a rabbit hole I didn't know about.
If your in a state without income tax you could well be itemizing and taking the sales tax deduction. Part of the calculation that you can see in the sales tax worksheet is the calculation of a special AGI.
The tax s/w I was using put quite a small value in my AGI because it removed the conversions I did from IRA to Roth IRA despite these not being part of AGI in the first place (it removed total conversion amount rather than just the gain). I had to enter the conversions differently to avoid this.
It's worth looking at this AGI since somebody who is retired could have quite a few adjustments and it's quite vague about whats allowed:

From schedule A instructions

Your 2016 income is the amount shown on your Form 1040, line 38, plus any nontaxable items, such as the following.
Tax-exempt interest.

Veterans' benefits.

Nontaxable combat pay.

Workers' compensation.

Nontaxable part of social security and railroad retirement benefits.

Nontaxable part of IRA, pension, or annuity distributions. Don't include rollovers.

Public assistance payments.

So things you might had are the exclusion for the sale of a primary residence, actual capital gains rather then those offset by losses (see how they calculate total income in form 1116), non-dividend distributions, capital gains distributions offset by losses, maybe even principle of asset sales (though I won't go this far). My tax s/w already adds in municipal bond interest and tax exempt dividends.
The basic idea is this is an estimate of your spending power and that's used with a table lookup to determine how much tax you might have spent. The IRC seems silent on this issue except to pass it off to the IRS to determine how it works.
Fixing the bug and adding in some extra stuff pushed me up two slots in the table.

 

[Gill]

I use actual sales tax paid and it comes out far ahead of the table.
Gill

 

[Philliefan33]

I use actual sales tax paid and it comes out far ahead of the table.
Gill

How do you track this? Keep a running total every time you buy something, or save all receipts and total at tax time?

Have you done the calculations to determine how much money you save by keeping track of your actual sales tax paid vs using the estimator, and then figuring out what your hourly rate was to track sales tax?

I would guess that this forum of LBYM types probably spend less than the estimator calculates, especially on discretionary (I.e. taxable) items.

 

[Gill]

How do you track this? Keep a running total every time you buy something, or save all receipts and total at tax time?

Have you done the calculations to determine how much money you save by keeping track of your actual sales tax paid vs using the estimator, and then figuring out what your hourly rate was to track sales tax?

I would guess that this forum of LBYM types probably spend less than the estimator calculates, especially on discretionary (I.e. taxable) items.

It's really quite easy when you use Quicken to track your spending. I calculate the sales tax by categories. For example, if I spend $3,000 on gasoline and the sales tax rate here is 7% I divide $3,000 by 1.07 and subtract the result from $3,000 giving sales tax of $196.26. I spend maybe 15 minutes on this at the end of the year. My hourly rate is zero so it costs me nothing to do this and last year I increased the sales tax deduction by about $1,500 which at a 28% bracket saved me $420 or $1,680 an hour. Not bad work for a retired guy.
Gill

 

[Gill]

Might want to recheck your math, 7% of $3000 is $210.

Sorry, you better check yours. When I pay $3,000 total for gasoline I haven't paid $210 in sales tax. Think about it. Appropriate name, Zinger!
Gill

 

[zinger1457]

Sorry, you better check yours. When I pay $3,000 total for gasoline I haven't paid $210 in sales tax. Think about it. Appropriate name, Zinger!
Gill

Yep, realized that right after I submitted it.

 

[Philliefan33]

It's really quite easy when you use Quicken to track your spending. I calculate the sales tax by categories. For example, if I spend $3,000 on gasoline and the sales tax rate here is 7% I divide $3,000 by 1.07 and subtract the result from $3,000 giving sales tax of $196.26. I spend maybe 15 minutes on this at the end of the year. My hourly rate is zero so it costs me nothing to do this and last year I increased the sales tax deduction by about $1,500 which at a 28% bracket saved me $420 or $1,680 an hour. Not bad work for a retired guy.
Gill

Certainly easy, but probably incorrect. There are other taxes on gasoline, included in your total. You don't pay sales tax on those other taxes... the math in your example overestimates the sales tax paid.

Other spending categories in Quicken would likely have issues. For example, (in PA), some clothing items are taxable and others aren't. At the grocery store, most food is not taxable but prepared foods are. If you track restaurant meals and pay everything with a credit card, do you take the tips paid out of the calculation? You don't pay sales tax on the tips.

I look at your method as an estimate, not a try tracking of sales tax paid. If I'm using an estimate and we get audited, I prefer the estimate to be the calculation suggested by the IRS.

 

[pb4uski]

One "trick" that I did a couple years ago. I usually pay my state estimated tax in December. In 2015 I bought a car I realized that I would be better off to take the sales tax deduction in 2015 and then push the state estimated tax payment for 2015 into January 2016 and combine it with the 2016 estimated state tax payment in December of 2016... otherwise I would have never got a benefit from the state sales tax on the car.

 

[Gill]

Certainly easy, but probably incorrect. There are other taxes on gasoline, included in your total. You don't pay sales tax on those other taxes... the math in your example overestimates the sales tax paid.

Other spending categories in Quicken would likely have issues. For example, (in PA), some clothing items are taxable and others aren't. At the grocery store, most food is not taxable but prepared foods are. If you track restaurant meals and pay everything with a credit card, do you take the tips paid out of the calculation? You don't pay sales tax on the tips.

I look at your method as an estimate, not a try tracking of sales tax paid. If I'm using an estimate and we get audited, I prefer the estimate to be the calculation suggested by the IRS.

Yes, as a Florida attorney and CPA I am aware of all you describe and I make adjustments for these items. For example, I assume 10% of grocery items are taxable. All clothing is taxable in Florida. The IRS will certainly accept a reasonable estimate in these instances. You can use your method but I prefer to take all to which I'm entitled.
Gill

 

[audreyh1]

If we've bought very large items during the year, like a car, we've added the sales tax paid as the IRS estimator allows you to do.

 

[Gill]

If we've bought very large items during the year, like a car, we've added the sales tax paid as the IRS estimator allows you to do.

There are strict limits as to what constitutes a major purchase. Major purchases include:
A motor vehicle (including a car, motorcycle, motor home, recreational vehicle, sport utility vehicle, truck, van, and off-road
vehicle)
An aircraft or boat
A home or substantial addition to or major renovation of a home.

Gill

 

[LARS]

It's really quite easy when you use Quicken to track your spending. I calculate the sales tax by categories. For example, if I spend $3,000 on gasoline and the sales tax rate here is 7% I divide $3,000 by 1.07 and subtract the result from $3,000 giving sales tax of $196.26. I spend maybe 15 minutes on this at the end of the year. My hourly rate is zero so it costs me nothing to do this and last year I increased the sales tax deduction by about $1,500 which at a 28% bracket saved me $420 or $1,680 an hour. Not bad work for a retired guy.
Gill

You should check me, but I believe all gas taxes are not allowable/includable IRS expense when calculating for sales tax paid deduction.

 

[Gill]

You should check me, but I believe all gas taxes are not allowable/includable IRS expense when calculating for sales tax paid deduction.

You're correct. I didn't say I deducted gasoline taxes but only the general sales tax on gasoline. Federal and state gasoline taxes are no longer deductible, although they once were. Even taxes on cigarettes were once deductible and many people claimed the deduction who didn't even smoke.
Gill

 

[Philliefan33]

You're correct. I didn't say I deducted gasoline taxes but only the general sales tax on gasoline. Federal and state gasoline taxes are no longer deductible, although they once were. Even taxes on cigarettes were once deductible and many people claimed the deduction who didn't even smoke.
Gill

Sure, but as you described in your example, I think you are still overestimating the sales tax paid on gasoline.

Quicken has the total spent on gasoline as $3000. By calculating the 7% tax on that total, you are including the other state gasoline taxes in the calculation. Did you pay sales tax on those state gasoline taxes? Probably not; so you would have to somehow back out the other gas taxes from that $3000 total before calculating the 7% sales tax paid.

Actually, according to this site Gasoline tax information - Florida Gas Prices

the sales tax on gasoline in Florida is 1.25 cents per gallon -- much less than 7% at current gasoline prices. You might want to update your calculations (or not, doesn't matter to me how you do your tax return).

DH is still doing enough contracting gigs that we are better off taking the state income tax deduction, but it is getting close. When he finally stops with the part-time earnings, we will take the sales tax deduction (and use the IRS estimator). Even though I'm ER'd it's not worth my time to track the actual sales tax paid.

 

[Gill]

Sure, but as you described in your example, I think you are still overestimating the sales tax paid on gasoline.

Quicken has the total spent on gasoline as $3000. By calculating the 7% tax on that total, you are including the other state gasoline taxes in the calculation. Did you pay sales tax on those state gasoline taxes? Probably not; so you would have to somehow back out the other gas taxes from that $3000 total before calculating the 7% sales tax paid.

Actually, according to this site Gasoline tax information - Florida Gas Prices

the sales tax on gasoline in Florida is 1.25 cents per gallon -- much less than 7% at current gasoline prices. You might want to update your calculations (or not, doesn't matter to me how you do your tax return).

DH is still doing enough contracting gigs that we are better off taking the state income tax deduction, but it is getting close. When he finally stops with the part-time earnings, we will take the sales tax deduction (and use the IRS estimator). Even though I'm ER'd it's not worth my time to track the actual sales tax paid.

You really are a dog with a bone on this one! Yes, I realize the calculation isn't precise and that I'm calculating sales tax on gasoline tax, but my figure is close enough for estimating purposes and why not bend things in my favor a bit? I would need to know the actual number of gallons to do otherwise; not necessary for this purpose. Furthermore, the chart you referenced is inaccurate. It reflects a state sales tax but not local sales tax which vary in Florida, being 7% in this county.

By necessity I have other estimates in my sales tax calculation, but if you wish to leave dollars on the table for the IRS have at it.

By the way, with your Philly connection, were we at Wharton together? Must have taken tax from a different professor...
Gill

 

[pb4uski]

While you guys are at it, how many angels can dance on the head of a pin?