Sales tax and state taxes in federal law

[ray.james]

hello all.

A job opportunity came to me where I have a chance to move to a state without state income tax. As I went comparing expenses, something stuck me a bit wierd.
Why does federal law allow tax deduction on sales/state/property taxes? What is the reason behind it.
Why does it allow only state or sales tax? Is it not discriminating some states based on their policies?

For my case after considering all taxes the effect turned out to be same. But I was just curious, the idea behind this tax legislature.

[LadyGeek]

This thread is now in the Personal Finance (Not Investing) forum (taxes).

[livesoft]

It wasn't too many years ago that only state income taxes were deductible and not sales taxes. Folks in states without state income taxes felt they were being short-changed, so they got their reps to change the law so that they could deduct sales taxes. So the law used to be discriminatory, but is less discriminatory I think as it is now. If one could deduct BOTH state income tax AND sales taxes, then it would go back to being discriminatory against folks without a state income tax, wouldn't it?

[harikaried]

Why does federal law allow tax deduction on sales/state/property taxes? What is the reason behind it.

As usual with laws, it's all politics. One piece of the puzzle is the Tax Reform Act of 1986. Another piece is what livesoft mentioned about sales tax becoming deductible again.

http://www.spokesman.com/stories/2013/f ... continues/

Before the Tax Reform Act of 1986, taxpayers were able to deduct both state income and sales taxes when filling out their federal returns. President Ronald Reagan and the Treasury Department tried to change that.

http://en.wikipedia.org/wiki/Tax_Reform_Act_of_1986
Seems like this act changed a bunch of things such as removing deductions for consumer loans, e.g., credit card debt, as well as adding income limits to IRA deductions.

[tj]

It wasn't too many years ago that only state income taxes were deductible and not sales taxes. Folks in states without state income taxes felt they were being short-changed, so they got their reps to change the law so that they could deduct sales taxes. So the law used to be discriminatory, but is less discriminatory I think as it is now. If one could deduct BOTH state income tax AND sales taxes, then it would go back to being discriminatory against folks without a state income tax, wouldn't it?

I don't think so. They already don't have to pay a state income tax. isn't that benefit enough?

If some states get to deduct sales tax, everyone should. The fact that you are taxed on your income by the state should not negate a sales tax deduction.

[Jack]

The deduction of state and local taxes is a tax expenditure that costs the federal government about $45 billion a year, according to the CBO.

[john94549]

I believe the concept initially was that taxes paid to other "sovereigns" (states or foreign countries) was not properly "income" and thus not taxable.

http://www.cpa2biz.org/Content/media/PR ... oodbye.jsp

The article linked above will probably answer OP's query.

[DieselEngineer]

As a NH resident, I feel doubly discriminated against.

But, at least I get to deduct property tax.

[jeffyscott]

As a NH resident, I feel doubly discriminated against.

Just the opposite, you get to deduct all of your state and local taxes, I can only deduct property tax and state income tax. I pay sales taxes but get no deduction for it. Just because the taxes are in more categories, I get a lesser deduction.

[livesoft]

^What we've got here is failure to communicate.

[etarini]

It wasn't too many years ago that only state income taxes were deductible and not sales taxes.

What's deductible seems to come and go, as fashions (and constituencies) change.

I remember when CREDIT CARD INTEREST and CAR LOAN INTEREST were deductible, which today would get a "Wait, what?" reaction.

(Deduction of personal interest was eliminated when Ronald Reagan signed the Tax Reform Act of 1986, which also increased the tax on capital gains from 20% to 28%., while lowering the maximum 50% rate to 28% for ordinary income, equalizing taxes on different sources of income.)

Eric

[jeffyscott]

Sales tax deduction was also eliminated by the 1986 act.

[scrabbler1]

It wasn't too many years ago that only state income taxes were deductible and not sales taxes.

What's deductible seems to come and go, as fashions (and constituencies) change.

I remember when CREDIT CARD INTEREST and CAR LOAN INTEREST were deductible, which today would get a "Wait, what?" reaction.

(Deduction of personal interest was eliminated when Ronald Reagan signed the Tax Reform Act of 1986, which also increased the tax on capital gains from 20% to 28%., while lowering the maximum 50% rate to 28% for ordinary income, equalizing taxes on different sources of income.)

Eric

I remember this, too. On my 1986 income tax return, I was able to deduct sales taxes including the sales tax on the car I bought that year. I also had a student loan at the time and was able to deduct its interest. With both items disappearing or nearly all phased out the next year, I began taking the standard deduction the next few years.

I am always puzzled by those who propose to "broaden the base and lower the rates" but then the base later gets shrunk when some base-broadening rules become undone. What's their solution? (Re-)broaden the base and lower the rates some more. How about simply broadening the base (again, to its former level) without lowering the rates?

[LadyGeek]

As a reminder:

In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited.

[ray.james]

Thanks for the links on 1986 tax reform, harikaried. Never knew there was a time with both sales and state taxes.

Tj, I agree that allowing deductions or not allowing them all would be a fairer one.

The argument of whether state taxes paid forms income/not is a very interesting argument. One of school of thought seems to be inclined to see it as overall government impact to its citizen with all taxes included and another thought seems to view it as what federal taxes provides to its citizens is different from state tax benefits. -( secure and safe country vs roads/parks/local safety).

As for politics, politicians of no sales tax state campaigning for deduction and viceversa made me smile..politics at finest level.

[reason-logic]

I moved from California to a state with no state income tax in 08 when I retired. I have been deducting sales tax on my federal return since that time, I believe this was recently extended as part of the "fiscal cliff" legislation.

It is important to have documentation. I purchased a Neat scanner which scans all my receipts, determines the sales tax and stores the images of the receipts on my computer in case of an IRS audit. I can run a report at year end and provide to my CPA.