USAToday.com - Timing is everything on tax breaks

From: USAToday.com - Timing is everything on tax breaks

Take advantage of the sales-tax deduction.

A tax bill enacted in 2004 allows taxpayers who itemize to deduct their state sales taxes instead of their state income taxes on their federal tax returns. But unless Congress votes to extend it, that deduction will expire at the end of this year.

The biggest beneficiaries are residents of states with no income tax. Taxpayers in those states who itemize can now take a deduction they never had before. But taxpayers in other states may also benefit. The sales-tax deduction merits your consideration if:

• You live in a state with low income taxes and high sales taxes. People in those states who have low taxable incomes might fare better by taking the sales-tax deduction.

For example, several states provide income tax breaks for senior citizens. Retirees in those states who made a major purchase in 2005 might get a larger deduction from sales taxes.

Pennsylvania, for example, has a 3.07% income tax and a 6% state sales tax. Similarly, Illinois has a 3% income tax and a 6.25% sales tax. In those states, "The sales tax in a particular year for some people could be greater than their income tax," says Bernie Kent, personal finance partner at PricewaterhouseCoopers.

• You've bought a car or plan to buy one by the end of the year. Taxpayers who claim the sales-tax deduction have a choice. You can use the actual amount of sales taxes you paid in 2005. Or you can use IRS tables that assign a deduction amount based on your adjusted gross income, dependents, filing status and state of residence.

But big-ticket items, such as cars and boats, get special treatment. You're allowed to claim the amount listed in the IRS tables, plus the actual sales tax paid on the purchase. For example, if the IRS tables allow you to deduct $600, and sales taxes on your new Acura total $1,000, you'll be allowed to deduct $1,600.