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TAXES
Another Break for No-Tax States
by Kevin McCormally

Tucked inside the fat corporate-tax bill passed just before the election is a little gift for residents of states that don't levy an income tax: a new deduction for what they pay in state and local sales taxes.

The new rule actually lets all taxpayers who itemize deductions choose to write off either income tax or sales tax on their federal returns. For residents of Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- who pay sales tax but no income tax -- the choice is simple. But residents of other states have to determine which write-off would be bigger (it will almost always be the income tax, except maybe in Tennessee, where only investment income is taxed). For them, the new break is more likely to produce confusion than put money in their pocket. (To see how income and sales taxes compare for a hypothetical family in each state, visit www.kiplinger.com/tools/taxmap.)

The sales-tax deduction can be claimed on 2004 returns, and this last-minute change is causing heartburn for the IRS. The tax agency must come up with state-by-state tables estimating how much tax families of different sizes and incomes pay during the year. The IRS couldn't get that data before it printed the 2004 forms and instructions, and it may be early next year before the tables are ready. That could slow down return filing and the delivery of refund checks next spring.

Back in 1986, the last year a sales-tax deduction was on the books, IRS tables allowed a Florida family of four with income (including tax-free income) of $50,000 to deduct $655. A couple with four or more children and $100,000 or more of income got to write off $1,096. The 1986 sales-tax estimates for the same families in South Dakota were $679 and $1,142, respectively.

If you have proof that you paid more tax than the table estimates, you can claim the higher figure. So, start saving those receipts for the new sales-tax deduction. If you buy a car or boat during the year, you can add the tax paid on such a big-ticket purchase to the table amount.

Reality check. The new break means nothing to you if you're among the majority of taxpayers who use the standard deduction. (It could, however, push some people who are now on the edge into itemizing--if adding sales tax to other deductible expenses puts them over the standard deduction.) If you're subject to the alternative minimum tax, the sales-tax deduction won't count (just as the state income-tax deduction doesn't).

And one more thing: Like so much of what Congress does with the tax law, this break is temporary. It applies only for 2004 and 2005.