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You have the option of claiming either general state and local sales taxes or state and local income taxes as an itemized deduction to reduce your tax bill. If you live in a state that doesn't tax income, you'll want to go through the Sales Tax Deduction section since chances are good that the sales tax deduction will be larger than any income taxes you may pay. The bulk of your state and local income taxes are usually reported on your W-2. If you've filled out your W-2 in this return,

TurboTax has already compared your state and local taxes to an IRS estimate of your sales tax (based on your income) to estimate which would be the higher deduction for you. You can go through the Sales Tax Deduction section and see which gives you the biggest deduction. In this section, you can either enter your actual expenses by selecting Enter All My Receipts and totaling all of your sales tax receipts for the year, or select EasyGuide to have TurboTax use sales tax tables from the IRS to estimate your sales tax deduction based upon your income.

What if I bought a car or other big ticket item?

If you choose to claim the deduction for sales tax using EasyGuide, you can also claim the state and local sales tax amounts you paid for big-ticket items such as: - Motor vehicles (motor homes, recreational vehicles, sport utility vehicles, and off-road vehicles) - Aircraft or boats - Your home, substantial home addition, or major home renovation if: a) Your state or locality charges tax on the sale of a home, the cost of a substantial home addition, or the cost of a major home renovation, or b) You purchased and paid sales tax on the materials to build a home, build a substantial home addition, or perform a major home renovation.

When entering sales tax items, you can only use your own state and local sales tax rate where you lived. If you paid a higher rate, for example, by buying a boat out-of-state, you can only include what the tax would have been using your state and local tax rate. How do I get this deduction? - You can only take this deduction if you itemize. - You can't deduct more than the general sales tax rate for your state and locality, even if you paid additional sales tax for an item. - If you're using purchase receipts to calculate your deduction, be sure to subtract the amount of sales tax on anything you returned for refund. Note: You can't deduct sales tax for alternative minimum tax (AMT) purposes.

What paperwork do I need?

If you choose to enter all of your actual expenses, keep your purchase receipts showing the actual amount of sales tax you paid. Also, keep receipts for big ticket items, such as vehicles or home improvements. Note: If you don't have records of the sales tax you paid, you can enter your combined state and local sales tax rate and TurboTax will calculate the deduction. (If you don't know your state and local sales tax rates, TurboTax will calculate your deduction based on just your home state sales tax rate. However, this might result in a smaller deduction.)

Why Would I Choose the Smaller Deduction?

Everybody wants to pay the lowest possible income tax, so would you not want to take the largest possible deduction? Most of the time, you will take the largest deduction. However, if you receive a refund of state and local taxes this year, and you take a state and local tax deduction, you will have to include the refund in your taxable income next year. If your refund is large, this could cause you to be in a higher tax bracket, or, if you receive Social Security benefits, may cause you to include more of your benefits in taxable income. By deducting sales tax, you will not have to include your refund in income next year.