Keeping all receipt, who does that?
Out of the 33 % taxpayers who elect to itemize most of them need to keep their receipts in other to benefit from that law. This new optional sales tax deduction certainly affects a taxpayer’s year-end planning and may pose a challenge for some taxpayers who failed to retain receipts for many of their prior 2004 and 2005 purchases. The IRS will allow taxpayers to bypass standard deduction and calculate the total themselves. Conversely, computing your sales tax is a bit more complicated. If you saved all your receipts and can total your sales tax paid for the year, then it is easy. However, if you failed to save your sales tax receipts you probably have other issues in this situation.
Advocates of the new sales tax deduction states that a taxpayer can choose to use their actual tax receipts saved up during the year or utilize the optional sales tax table provided by the IRS. Moreover, they contend that the optional sales tax table provides an accurate estimation of the total sales expenses incurred by the taxpayer, if they so choose not to use their actual receipts. In addition, they add that the table is easy to use and understood by anybody. These are good points that the advocates have used to back their arguments. However, the overall principle that supports their case is primarily when a taxpayer uses the itemized deduction. As we had explained earlier, statistics have showed the huge discrepancy in the percentage of people who utilize the standard deduction against the itemized deduction. Furthermore, keeping track of your actual receipts is indeed the ideal way to maximize the new option. Keeping track of receipts is a tedious work and not a lot people are able to meet that challenge. We also have to keep in mind that low-income taxpayers are usually the “everyday-spenders” of necessities such as food and clothing. We can only imagine the burden that they have to undertake if they tried to save all their receipts and calculate themselves their total cost of sales tax expense at year end (Again, what’s the use of saving the receipts and calculating the cost if they’re not going to itemize anyway?). In addition, the optional sales tax table does not exactly present the best estimation of sales tax expense. Sales taxes usually end up as a lower figure in comparison with the State income tax (unless you made big purchases during the tax year, which you will definitely benefit from it).
What about the seven state with no state income taxes?
One the strongest argument of the proponents is of the seven states that do not have state and income tax deductions to put in their schedule A. Those states are Alaska, Florida, Washington, Texas, Nevada, Wyoming and South Dakota. Yes, we agree that extending section 164 (b) (5) will benefit the taxpayers in these states because they do not have a state and local income tax to deduct in their schedule A, but we will show later on that extending this law can have a negative impact on the greater number of people. Besides, not extending that law will not make the taxpayers of the seven states financially worse of. They have only pay sales taxes on general item and not state income taxes. Whereas, all the other taxpayers in the other states have to pay both general sales taxes on everyday items and state income taxes. We do understand that the seven states have higher sales taxes on general items, but it is just the price to pay in other for the state to survive, to subsidize organization such as schools, welfare and healthcare. The fact that their sales taxes are high is not too much of a pain for them because they don’t pay state income taxes. In fact, one could argue the taxpayer in the other states probably pay less compare to the rest of the state with both state income taxes and relatively low general sales taxes.
Not extending the law is not a punishment for the other seven states because in a way they are double benefiting from it. The taxpayers would benefit from government subsidizing their children’s schools and health care, they would get to deduct some of those sales taxes in their federal income taxes plus, they do not pay state income taxes. Whereas the rest of us whom will not elect to take the option of itemizing state and local general sales taxes will be potentially worse off because this law leave a window of opportunity for the state to increase sales taxes on general items.
Potential Increase of General Sales taxes Rate
As explained earlier, extending the law will give the state a window of opportunity to increase general sales taxes of item taxpayers purchase everyday. If taxpayers can have a deduction for their general sales taxes, the state might find it reasonable to increase sales taxes on general item and no one would find a plausible explanation to lobby against it. They might stipule that it does not affect the taxpayers if they take more money now and give a tax break later in the year. However, the fact is most taxpayers will not benefit from section 164 (b) (5). As explain earlier, besides the wealthy, only a small percentage of people will take advantage of this law. As we have seen, in other for taxpayers of income $ 50.000 or less to take advantage of this law, they would need to keep track of every single receipt of item purchase during the year. As most taxpayers do not keep receipts, they would be eligible to put in their “schedule A” the small amount of money in the table that would probably be less than deduction of state and local income taxes. Thus, most intelligent taxpayers would choose to itemize their state and local income taxes instead of state and local general sales taxes or take the standard deduction if they don’t itemized. As a result, extending the law will benefit a small percentage of individual and risking the increase of sales taxes of the majority of taxpayers and people that is not in the workforce.
Conclusion
We are against the extension of section 164 (b) (5). Most taxpayers will not use it because they will take the standard deduction. The taxpayers that itemize will most likely deduct their state and local income taxes because they may not save all their receipts and the amount in the IRS table will be smaller than state and local income taxes. Furthermore, this law does not help taxpayers it only confuses most people and could even mislead certain people in deducting less than they really entitled to. Extending section 164 (b) (5) could potentially encourage people to spend more than they would usually spend; hence, less money if our savings account. Lastly, it could give the state an opportunity to increase sales taxes of general items as they need extra fund.
