Question

Here are some SALT-related facts regarding your 2019 tax year:

• You paid $9,000 in state income taxes by way of payroll withholding by your employer. Now (in 2020) that you’ve just filed your 2019 state return it turns out that you owed only $7,500; you’ll get a refund soon.
• The IRS sales tax deduction table [see textbook Exhibit 8-3] says that your 2019 deduction for sales taxes is $4,000. However, you saved every re-ceipt for everything you bought during 2019 and know that, not counting the new car you bought, your actual total of sales tax paid was $4,900.
• You bought a car during 2019 and paid another $4,000 in sales tax on that purchase.

On these facts, how much will you claim on line 5a of your Schedule A for 2019?

Answer 1

ANSWER

Step 1:Calculation of eligible State and Local Tax

Actual payment of state income tax for 2019=$9000

Actual tax payable to the SALT for the year 2019=$7500

Refund eligible=$1500

Hence ,Net Tax eligible for claim under line 5a of schedule A =$7500.

Line 5a of schedule A means we can only choose one deduction of state and local income tax or General sales tax.

Step 2:Calculation of General sales tax

Actual sales tax paid during the year 2019= $4900

Eligible sales tax deduction= $4000

Sales tax for new car purchases =$4000

Total sales tax payable in 2019=4000+4900-4000

                                             =4900

Note:The IRS allows for a deduction of sales and use tax paid as an option for those who itemize their deductions ,letting them choose between deductions for state and local income taxes or state and local sales and use taxes.Taxpayer will indicate by using a checkbox on line 5a of schedule A which type of tax they are claiming.

Hence above calculations we can take only $7500 as claim in line 5a of schedule A.