Uncertainty

The old saying goes, "Two things are certain. Death and taxes." It seems like the extreme right wing of the Republican Party is completely against that. The death issue has been done, well, to death in recent days, so let me turn our attention to taxes.

Last night we got our taxes done and something interesting came up. We were asked if we had bought a boat or luxury car because a new tax law could give us an advantage. We of course said, "Whaaa?" It turns out that the state sales tax you pay could be used to help you in your deductions on federal tax. The list of usual suspects that would put you in that category include airplanes, boats, luxury cars, etc.

Doing a google search I came up with very little analysis of the subject, but one pretty good LA Times article called Sales Tax Deduction Is Back--With A Catch. It starts, " Big spenders, start saving your receipts."

The recently passed American Jobs Creation Act of 2004 includes a provision that gives taxpayers who itemize deductions a choice: They can write off the state income taxes they pay, or they can choose to claim their sales taxes instead.

This new tax break was pushed by members of Congress in states without income taxes, who saw it as a way of getting their residents an added deduction. But it also has potential for big spenders in California, which has both relatively high sales tax and high income tax rates.

Uh, hello, and the rich.

The sales tax deduction is a blast from the past, experts note. Twenty years ago, taxpayers were able to deduct both income taxes and sales taxes, so savvy taxpayers regularly kept track of their purchases. But the Tax Reform Act of 1986 eliminated write-offs for sales taxes.

This law is a bit more complex than the pre-1986 rules, because taxpayers must make a choice. They cannot deduct both income and sales taxes; they must choose one or the other. Ideally, taxpayers would figure out which tax nets the best deduction.

You know, the type of work your tax accountant can do for you... if you're rich.

The law also creates an opportunity for those willing to plan... Smart shoppers can now "bunch" big purchases, just as some taxpayers bunch other itemized deductions.

"If you know that you are going to be purchasing a car and doing major work on your house, you might want to consider doing both of those in the same year...You could create a situation where you could take advantage of the sales tax in one year and go back to using the income tax deduction when you are back to your normal spending patterns."

So, if you're going to be a conspicuous consumer, save your receipts.