I have a stupid question — if you don’t have a state income tax, doesn’t that mean the money just goes to the Feds instead of the state? When you pay state income tax, it’s deductible from your federal return. There’s a much smaller deduction for sales tax, but it’s negligible in comparison — right? So you end up paying more in federal taxes?
That only depends on how much you have to pay in state taxes and how much you pay in sales tax. If your state taxes plus other deductions are higher than the standard deductible, then yes you would be lowering your federal deductible. If you weren’t making enough money to itemize, then this won’t change anything.
The real question is whether people who pay more state income tax than the maximum federal deductible also pay more sales tax. I sure don’t, even in a high sales tax state; so this would lower my federal deduction. For higher income people who buy more expensive stuff, this might not change their federal deduction. I think the number is $10,000, so you would have to pay more than $10,000 in sales tax in a single year to NOT lower your federal deduction. I guess a very rich person might buy a new $100,000 car every other year plus tax on a lot of luxury goods to get to that amount.
When you itemize federal taxes, you can deduct up to $10,000 in state taxes (either income or sales, but not both). Since it is difficult to get up to $10,000 in sales taxes but not that difficult to reach $10,000 in income taxes, then most people who itemize will end up paying higher in federal taxes.
I have a stupid question — if you don’t have a state income tax, doesn’t that mean the money just goes to the Feds instead of the state? When you pay state income tax, it’s deductible from your federal return. There’s a much smaller deduction for sales tax, but it’s negligible in comparison — right? So you end up paying more in federal taxes?
That only depends on how much you have to pay in state taxes and how much you pay in sales tax. If your state taxes plus other deductions are higher than the standard deductible, then yes you would be lowering your federal deductible. If you weren’t making enough money to itemize, then this won’t change anything.
The real question is whether people who pay more state income tax than the maximum federal deductible also pay more sales tax. I sure don’t, even in a high sales tax state; so this would lower my federal deduction. For higher income people who buy more expensive stuff, this might not change their federal deduction. I think the number is $10,000, so you would have to pay more than $10,000 in sales tax in a single year to NOT lower your federal deduction. I guess a very rich person might buy a new $100,000 car every other year plus tax on a lot of luxury goods to get to that amount.
How exactly do you end up paying more in federal taxes if you don’t have to also pay state taxes?
When you itemize federal taxes, you can deduct up to $10,000 in state taxes (either income or sales, but not both). Since it is difficult to get up to $10,000 in sales taxes but not that difficult to reach $10,000 in income taxes, then most people who itemize will end up paying higher in federal taxes.