New Math for Tax Deductions

You charge away on your credit card to rack up frequent flier miles, only to find out you can't use them because of those insidious blackout dates.

Well, good news. Now you can get something a bit more useful for all that money you spent.

A tax deduction.

That's right. The sales tax deduction is back. Eliminated by Congress back in 1986, it's temporarily available again for 2004 and 2005.

So if you itemize your deductions on your tax return, start tallying those receipts.

The Option Is Yours

When you itemize, you can deduct things like mortgage interest, real estate taxes and charitable contributions on Schedule A -- Itemized Deductions. You also get to deduct any state and local income taxes you paid in that year.

And for folks in states like New York, that's a pretty big deduction. But for taxpayers in, say, Florida, where there is no state or local income tax, that line on Schedule A is blank.

Now, thanks to the American Jobs Creation Bill of 2004, and much lobbying by the congressmen and senators in states without state income tax, you have a choice. You can deduct either your state and local income taxes or your total sales tax paid.

Big note: You can't take both.

Typically, you would chose whichever is higher, but there are other considerations.

Depending on where you live, this may be a home run for you. Folks in places like Texas, where there is no state income tax and plenty of sales tax, will have no problems deciding how to play the tax deduction game. Same goes for Illinois residents, says John Logan, a state tax expert with CCH Inc., which provides tax and business law information.

And if you live in a state like Connecticut, where the income tax is actually pretty low, your sales tax expenditures may be higher.