Congress Considers Income and Sales Tax Deductions

 
 
January 11, 2012

Washington, DC, January 11, 2012—As Congress debates whether to continue allowing taxpayers to deduct the amount they pay in state sales taxes from their federal returns, a new analysis from the Tax Foundation finds that states vary widely in the number of individuals taking the deduction, with the greatest impact seen in states that have a very low or no state income tax.

Taxpayers who itemize deductions have the option of deducting state and local taxes from their income. In doing so, each individual taxpayer must decide to deduct either the income tax withheld from his or her wages, or the total sales tax he or she paid during the tax year. The option of deducting sales taxes, however, expired on December 31st, and will need to be renewed by Congress in order to be in effect for 2012.

 

States vary widely in the percentage of taxpayers who use each deduction. In general, more taxpayers elect to deduct income taxes than sales taxes. However, as one might expect, states that have no (or low) income taxes tend to see most taxpayers deducting sales taxes instead. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming are all states in which over half of the taxpayers elect to deduct state and local sales taxes, rather than income taxes, on their federal return, and these are all states that have either a very limited income tax (in the case of Tennessee) or no income tax at all.

 

Individuals who choose to deduct sales taxes have the additional option of reporting the exact amount (if they saved all their receipts) or using an estimate from the IRS that depends on their state and their income level. If the provision is not extended by Congress, sales taxes on purchases in 2012 will not be deductible, but tax paid on purchases made in 2011 will continue to be for returns filed this year.

 

Tax Foundation Fiscal Fact No. 288, “States Vary Widely in Number of Taxpayers Deducting State or Local Sales Taxes” by Nick Kasprak is available online.

 

The Tax Foundation has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Follow Us

Tax Policy Blog

The official weblog of the Tax Foundation.

Go

Tax By State

For information on your state, select it from the drop-down menu.

 

Ask a Tax Expert

Contact information for Tax Foundation policy staff Ask