The bulk of my work in tax return preparation is in the world (specifically the Appleton – Oshkosh area) of income tax .   I add up a taxpayer’s income, and then deduct everything I am legally able to in order to arrive at a “taxable income”.     One common theme (although not universal) is the idea that income that has already been taxed should not be taxed again.   This seems pretty straight forward, but the slippery slope of taxes can bring this down a very gray road.

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I thought you would never ask me to provide an example (I am assuming that your curiosity had you asking something like “how can double taxation become gray?”).

I recently purchased a new cell phone.   I suppose a more accurate definition would be “smart phone” (among the sea of applications and features, it also can be used to make phone calls).   I had to pay a 5% sales tax on this phone.   Well, as those of us hopelessly trying to keep up with technology appreciate, the sales tax on this phone can accumulate to a rather large amount!   My wife and I both purchased the same phone, and combined the total came to $419.14.   Jumbled up in that figure were some phone accessories and, more relevant to this post, $19.96 sales tax.

Let’s take a step back and think about what is going on.   I was paid for my hard work by my employer.   I used a portion of that income to purchase phones; smart phones that my wife and I can’t put down for the life of us.   The State of Wisconsin sees I am doing well for myself, purchasing something that is not essential to survive (debatable), and wants a piece of the benefit, so $19.96 of my income ends up in the pocket of Uncle Sam.   At the end of the year, I’m going to report to the government the gross wages I received from my employer.   That gross figure is going to be taxed.   My $19.96 just got taxed twice!

I mentioned earlier that I make money at Tax Relaxer through finding my customers as many deductions as I can to help them arrive at the lowest “taxable income” as possible.   Shouldn’t sales tax be a deduction?   Well, the short of it is, it is, sort of.   You can choose to either deduct your state and local income tax withheld, or your total sales tax paid all year.   You get to pick.     Well, if you want to save all of your receipts, go right ahead, but the burden of proof when it comes to the IRS is on YOU and that is a hefty burden if you tried to claim sales tax rather than income tax.   That’s a lot to keep track of!

90% of the time it’s a deal that works out better for you.   We have 5% sales tax here in most of Wisconsin, but there are exceptions.   One of which is Brown County, which has an additional 0.5% to help pay for the renovations to Lambeau Field.   Let’s say you make $10 an hour working full-time.   That’s about $20,000 a year.   Assuming you didn’t monkey around with how much was withheld; you would have had about $1,000 withheld.

That’s a pretty high bar of sales tax to conquer!   I would have to go back and purchase 98 more smart phones for me to achieve that hurdle.   Unfortunately, that would cost me $20,537.86; conveniently enough, that’s just about all I made last year in this example!

Fair?   I think it’s fair.   We get double taxed on our income we use to purchase things, but the compromise more than makes up for it.   If you are a big spender, I’m sure you have larger concerns beyond taxes to worry about!

Kevin

See also: Should I pay tax from the money I get at a rummage sale?