Vehicle Sales Contract

• In order to deduct sales tax paid on a vehicle, the sales contract must clearly define the amount paid for sales tax on the vehicle purchase. While regular vehicle purchases usually list sales tax as an individual item on the sales contract, lease contracts often combine the sales tax with the total purchase cost of the lease. Ask for the dealership to separate the sales tax on the sales contract in order to support your sales tax deduction if you're ever audited.
  
  

Choosing an Itemized Deduction

• Taxpayers who pay state income tax have a choice of deducting state income tax paid or sales tax paid as an itemized deduction on Schedule A. You cannot deduct both amounts. In most cases, the sales tax deduction is less than the state income tax paid; but if you have made major purchases during the year or have a low state income tax rate, the sales tax deduction may be more beneficial for you to claim. You should compare the deduction amounts and choose the one that offers you the biggest tax deduction.
  
  

Calculating the Sales Tax Deduction

• If you kept all your receipts for purchases during the year, you can add the sales tax from all of your receipts, including the vehicle sales contract, to determine your sales tax deduction. If you did not keep all your receipts or do not want to take the time to individually process the receipts, you can use the sales tax calculator provided by the Internal Revenue Service to determine your allowed sales tax deduction. The sales tax deduction calculator assigns you a standard sales tax deduction based on your household income, personal exemptions and geographical location. The calculator provides a separate place for you to enter the sales tax paid on large-ticket items, such as a vehicle purchase, so that the tax on those items can be added to the normal allowed deduction.
  
  

Reporting the Deduction

• You record your sales tax deduction on Schedule A in the "Taxes You Paid" section. Check the box for general sales tax and enter the amount of sales tax you paid during the tax year, or the amount calculated using the sales tax calculator, on the corresponding line.