Texas – Sales Tax Deductions on Federal Income Tax Returns

SALT Report 1451 – Texans who itemize deductions on their federal income tax will be able to deduct state and local sales or use taxes when they file their 2011 income tax returns.  Eligible deductions include sales or use taxes paid on big-ticket items such as cars, recreational vehicles and boats. Taxpayers can claim the deduction for state sales and/or use tax in one of two ways: they can keep receipts and claim the actual amount of taxes paid, or they can use the tax tables provided by the IRS.

Taxpayers who built a new home or improved their home in 2011 may be able to deduct sales taxes paid on the materials incorporated into the property.  In order for a homeowner to be eligible for this deduction, the homeowner must have purchased the materials directly from, and paid tax to, the building materials supplier, or worked with a contractor under a separated contract. Labor is not a taxable service for new construction or residential repair and remodeling.

Lump sum contracts are not eligible for the tax deduction under Texas Tax Code Section 151.056(a) because the lump sum covers both the services and the materials in the contract. Under such a contract the contractor is considered to be the consumer of the materials that will be incorporated into the project. As the consumer, the contractor must pay the sales tax on all materials and should not collect tax from the customer. Since the customer did not pay tax to the contractor, the customer cannot deduct the tax on the federal income tax return.

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Texas Tax Talk – Sales Tax Deductions on Federal Income Tax Returns