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Thursday, October 20, 2005

Spend it Now, Not Later

The remaining months of 2005 may provide a last chance opportunity for taxpayers who itemize deductions to deduct state and local sales taxes in lieu of state and local income taxes.

For tax years beginning in 2005, taxpayers may elect to take state and local general sales and use taxes as an itemized deduction, instead of deducting state and local income taxes. Internal Revenue Code Section 164(b)(5). Electing taxpayers may either (a) deduct their actual sales and use taxes or (b) use IRS-published tables and then add to the amount from those tables the actual amount of their sales tax for certain "big-ticket" items—motor vehicles, boats, aircraft, homes (including mobile and prefabricated homes), and home building materials.

This provision primarily benefits taxpayers who live in states without an income tax, but some taxpayers in other states may benefits if they made major purchases during the year and their state income tax is relatively low.

This option to deduct sales taxes is set to expire at the end of 2005. While it may be extended, there is no way of knowing what Congress may do. Accordingly, individuals who are considering the purchase of a big ticket item (such as an automobile) may want to complete the purchase in 2005 to achieve a higher itemized deduction for sales taxes.

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