Avoid Mistakes in Last-Minute Tax Prep

Sales Tax Boo-Boo

In typical IRS fashion, the agency came out with new rules about the deductibility of sales tax in 2004 and 2005, disseminated the information to most of the tax-paying world, and then changed its mind about some of the guidelines.

Uncle Sam says he's making the language clearer. Sure. Apparently too many people were getting an additional tax break and he needed to put an end to that, pronto.

Here's what you need to know. You can now add up all the sales tax you paid in 2004 and deduct it on your Schedule A - Itemized Deductions in lieu of your state and local income tax deduction.

But since it's unlikely that anyone has saved receipts showing all the sales tax paid in 2004, the IRS created Publication 600 - Optional Sales Tax Tables to help. These tables take into account things like your filing status and the number of exemptions you claim and then offer a best guess of what someone in your tax position would probably have spent on sales tax.

These charts don't take big purchases like cars, boats and airplanes into account, so you can add on the sales tax from those items to your final number.

In addition, the IRS said that you could include the sales tax from homebuilding equipment. So originally, it was presumed that if you put an addition on your house and bought all the materials yourself, as long as you have the receipts, you can add that sales tax on, too.

Well, I guess too many people were doing additions last year.

The language now says that only the sales tax you paid to build an entire home is includable, says Martin Nissenbaum, national director of income tax planning at Ernst & Young.

So for the 10 of you who built homes and paid sales tax in 2004, congratulations.