Wednesday, May 23, 2007


Unless Congress does something several popular tax breaks will expire on December 31, 2007 – so this year may be the last year to take advantage of them.

While I have high hopes that most, if not all, of the expiring tax breaks will be at least temporarily extended, with the Democrats now in charge of both houses the odds of this happening have been somewhat reduced.

Congress waited until literally the very last minute, December of 2005, to extend the “above-the-line” deductions for educator expenses and tuition and fees and the option to deduct state and local sales taxes paid instead of state and local income taxes paid on Schedule A, all of which were originally scheduled to expire on December 31, 2005. But they only extended these deductions for 2006 and 2007. As it now stands they will not be allowed in 2008 and beyond. For specific information on these deductions see my December 2006 postings “They’re Back – Part One” and “They’re Back – Part Two”.

While the “above-the-line” deductions do not require any special year-round tax planning – educators will no doubt spend at least $250.00 on classroom supplies and the like whether or not this break exists, and the tax-planning aspect of the tuition and fees deduction involves determining whether it is better to claim the deduction or take a tax credit, which is done when preparing your return – calculating your tax benefit from deducting state and local sales tax requires year-round action.

An item from a tax planning booklet I wrote back in 1983, when you could deduct both state and local income tax and state and local sales tax (part of which I quoted in my “They’re Back - Part Two” posting), is once again relevant for 2007 returns:

“The second option states that ‘if you kept records that show you paid more sales tax than the tables list you may deduct the larger amount.’ More likely than not, in the course of a year you will pay more state [and local] sales tax than the tables allow.

The key to the substantiation of this deduction lies in the phrase, ‘if you kept records’. Keep a manila envelope or shoe box in your kitchen, bedroom or study and save every supermarket, department store, credit card or other receipt that lists the amount of sales tax paid on your purchases. If you are dining out and pay cash, make a note of the date, name of restaurant, cost of meal, and amount of sales tax and put it with your receipts. If you use your credit card when dining out, make sure the sales tax is itemized on the receipt.

At the end of the year, add up the sales tax from these records, exclusive of any applicable to a car, boat, etc, and compare your total to the amount allowed in the Optional Sales Tax Table. You may find that you are allowed a larger deduction by using the tables, but you will never know unless you save your receipts and compare.”

Remember that the actual state and local taxes paid on the purchase of “big-ticket” items such as a car, motorcycle, motor home, recreational vehicle, sport utility vehicle, truck, van, off-road vehicle, boat, airplane, home, and home building materials, and any sales tax paid on the lease of a motor vehicle, can be deducted in addition to the amount from the tables, so do not include the tax on such items when comparing the actual amount from your receipts to the amount allowed in the tables.

FYI, I have found the sales tax deduction to be especially beneficial for many of my retired taxpayers who itemize. New Jersey, like many other states, has a “retirement income exclusion” which, combined with the $10,000 or $20,000 filing threshold (depending on filing status), means that seniors often pay minimal, if any, state and local income tax.

Here is something else to keep in mind when deciding which tax to deduct. Just about every state income tax return will not allow you to claim a deduction for state and local income taxes, but I have come across a few state returns that will permit a deduction for state and local sales taxes.

To be continued …..


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