sales tax deduction question

[mblatour]

This may seem far fetched. Then again, maybe not.... If a client had a house fire last year and rebuilt, can they use the amounts they paid in sales tax for all materials, replacement of belongings, etc. as an actual sales tax deduction on Schedule A (rather than the state tax)?

The reason I'm wondering is because the purchases were made from reimbursement money from their insurance company. They still spent the money, so can they deduct the sales tax, or not?

Just really didn't know about this, but it popped into my head as an option. Any thoughts??

Thanks in advance.
~Becky

[Kram BergGold]

My guess

If they spent exactly the amount they were reimbursed by the insurance company then I owuold say they can't deduct the sales tax because if they did so they would create a casualty gain. If they spent way more than they were reimbursed then I don't see why the couldn't deduct the sales tax.

[Nashville]

Both Ways

I would try it both ways. If this is for MN or WI, the state income tax is always available as an alternative to taking sales tax. I would try this first, and then include the sales tax as the money that exhausts the insurance proceeds, so as to minimize or avoid a casualty gain.

Then use the sales tax as an itemized deduction in lieu of MN or WI income tax. If you do this, then you can't include sales tax as money you spent from the insurance proceeds. As Uncle says, "No double deduction."

[Remember, if there was not adequate reimbursement to replace the loss in FMV there might not be a casualty gain even if sales tax were drawn out]

[BOB W]

Remember>>> The sales tax must be for materials the t/p paid directly for in their name. Contractor would have to be labor only.

[Nashville]

Contractor Billings

Bob, I've heard a couple horror stories about contractors being asked to go back on work they have done, and split out the materials separately. This is presumably so the payer can deduct the sales tax on the materials.

I don't think such a deduction for sales taxes would be allowed. Would the taxpayer have to pay Home Depot, Lowe's, Bill's lumber yard, etc. personally? What if there was a separate check to the contractor for materials only? Would that be segregation enough?

[FEDUKE404]

Perhaps take everything?

It is my understanding the sales tax on building materials (only) can be added to the "table" amounts. As mentioned by others, the exact add-on amounts must be readily determined to have been paid by the homeowner, and not hidden in the price of the house.

Conversely, if the client wishes not to use the tables, and keeps track of every penny paid for sales tax on the home building materials, replacement furnishings, clothes, meals, and everything else (!) during the year, I see no reason that cannot be done instead.

(The insurance reimbursement issues are a separate issue, however)

FE

[taxxcpa]

Sales tax

Bob, I've heard a couple horror stories about contractors being asked to go back on work they have done, and split out the materials separately. This is presumably so the payer can deduct the sales tax on the materials.

I don't think such a deduction for sales taxes would be allowed. Would the taxpayer have to pay Home Depot, Lowe's, Bill's lumber yard, etc. personally? What if there was a separate check to the contractor for materials only? Would that be segregation enough?

If the contractor buys the materials tax free and "resells' them to the customer and charges the customer the tax on the resale price, it might work. Contractors, in the past, always billed lump-sum unless their customer was an exempt organization, in which case they broke out the materials, obtained an exemption certificate from the customer and issued a resale certificate to their supply source.

If insurance reimbursed the customer for the materials, then the tax on the materials attributable to the reimbursement would not, in my opinion, be deductible.