AKAMAI MONEY

By Deborah Adamson
Advertiser Staff Writer

Q: Could you please address new federal tax law changes regarding the option to deduct state and local sales taxes, in lieu of deducting state and local income taxes, and its application to Hawai'i? I understand the general excise tax is not technically a sales tax. ... I'm planning to hire a contractor to build a new house and I was wondering if I can deduct (sales taxes related to) building and other large costs? — Robin Hirano, Kailua

A: When President Bush signed the American Jobs Creation Act of 2004 into law last month, he also resurrected a federal tax break for individuals for at least this year and 2005 — the deduction of state and local sales taxes.

The new law lets individual taxpayers choose between deducting their state and local sales tax or their state and local income taxes if they itemize their deductions on their federal tax return, according to the Internal Revenue Service.

You might also be able to claim the sales tax deduction on your Hawai'i tax return if the state Legislature votes next year to adopt the change and you itemize. The state generally conforms to changes in the federal tax code.

The state is awaiting a decision from the IRS on whether Hawai'i's general excise tax would qualify as a sales tax, said Cathleen Tokishi, tax information specialist for the state Department of Taxation.

Hawai'i's general excise tax was considered a sales tax before the federal deduction was repealed in 1986, Tokishi said.

To claim the sales tax deduction, you can either total up your receipts or use an IRS table of deductions based on the average consumption by taxpayers by state. The IRS hopes to make the tables available to the public by the end of the year.

If you use the tables to estimate your deduction you can add sales taxes paid on cars or boats you purchased on top of the standard deduction, the IRS said. Other items could be included as well — perhaps even taxes on building materials or appliances — but these haven't yet been identified by the IRS.

So who should claim the sales tax deduction?

For people who itemize deductions, such as homeowners: when sales taxes paid are higher than their state income taxes.

For people who normally take the standard deduction, such as seniors on a fixed income: when sales taxes paid plus any additional deductions, such as charitable donations, exceed the standard deduction.

In 2004, married couples filing jointly could claim a federal standard deduction of $9,700 and singles could get $4,850.

"More than likely, the standard deduction would be higher," said Mark Luscombe, principal analyst for federal taxes at CCH Inc., a tax information services firm in Riverwoods, Ill.

While the IRS still is working on the sales tax deduction tables, residents can go back in history for an idea of the amount allowed under the standard deduction.

Two decades ago, a family of four in Hawai'i making between $50,000 and $60,000 could take a fixed sales tax deduction of $786 while a family of four earning $100,000 and up could deduct $1,087, Luscombe said. Back then, Hawai'i's GE tax was 4 percent, compared with 4.166 percent today.

The clearest winners of the sales tax break are residents of states — such as Nevada — with no income tax but which charge sales taxes, Luscombe said.

Got a personal finance or consumer question? Contact Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088. Please include your full name and the town in which you live.