Calculating Your Sales Tax Can Pay

QUESTION: I overheard someone at a restaurant talking about calculating their own sales tax for income tax purposes rather than using the IRS sales tax tables. Is that legal, and is it possible that you can come out ahead by doing this?--R.V.

ANSWER: Figuring your actual sales tax is perfectly legal. And doing so can pay off in spades, particularly if you are a typical Baby Boomer--that is, a consummate consumer.

Since the figures in the sales tax tables are based on your actual income and your actual family size but also on someone else’s idea of the typical spending habits of a consumer at your income level, there are bound to be some taxpayers who are shortchanged by the tables.

If you bought such things as furniture, stereo equipment, appliances, jewelry, furs or other expensive clothing, for example, you almost certainly would be better off figuring your actual tax. The tables don’t take such purchases into consideration, and taxpayers aren’t allowed to add those items to the deduction allowed by the tables.

Those taxpayers fortunate enough to earn more than $100,000 a year are particularly cheated by the tables, since the allowable sales tax deduction therein is based on income up to $100,000.

So what determines whether you can scrap the tables and use actual figures? Records.

If you kept receipts on all of your purchases last year, simply tally the amount of sales tax that the receipts show you paid. Canceled checks serve the same purpose but require you to calculate what percentage of the total price went to sales tax.

In your calculations, don’t forget your grocery bills. Food isn’t taxed (prepared meals served to you at a restaurant, though, are another matter). But such non-food items as paper towels, razor blades and liquor are. It isn’t necessary to keep the receipt every time you shop for groceries. Just keep enough of them to establish a pattern--for a month or two, say--and figure out what percentage of your total bill went to taxable items. Then, apply that percentage toward your total grocery bill for the year and calculate your tax on that amount. Also, be sure to keep your homespun formula on hand in case you’re ever asked to explain to the IRS how you arrived at it.

Once you have figured out how much you actually gave up to sales taxes for the year, compare that figure with the amount in the IRS tables. This procedure will take a little time since it involves several steps.

For this calculation, you are permitted to add to your adjusted gross income such income as veteran’s benefits, workers’ compensation, public assistance payments, the non-taxable portion of Social Security or railroad retirement benefits, interest on state or municipal bonds, the untaxed portion of long-term capital gains, unemployment benefits and the deduction for a married couple when both spouses work.

You may also add such income as inheritances, prizes, awards and gifts.

Once you have calculated your total income, turn to the table and find the line for your state (since sales taxes vary from state to state and even locale to locale in some cases) and family size, and follow the IRS instructions. To the sales tax deduction you arrive at from the tables, you may add the sales taxes you actually paid on a home, motor home, car, motorcycle, truck, boat, airplane or materials to build a new home.

Now, compare the two numbers. You are permitted to deduct the larger.

Q: I am a 75-year-old physician and am still very active medically. I work for health maintenance organizations and private physicians when they need extra help. I am not employed by them; rather, I am an independent contractor. I have a room in my apartment where I keep 50 years of medical books and do all of my medical research and paper work. It is my only office. Is it tax-deductible?--S.M.P.

A: Probably not. Even though your room is used exclusively and regularly as a place of business, it doesn’t sound as if it is your principal place of business. Nor do you indicate that you see patients at your home office. And in order to qualify for the office-at-home deduction, you would have to meet at least one of those tests. (A third test doesn’t apply to you--that is, that the office be a separate structure, not attached to your home, and used exclusively on a regular basis in connection with your business.)

The problem with your arrangement in the eyes of the IRS is that your business centers around patients, not books. So no matter how much time you devote to research and keeping up with advances in your profession, you are in business to help patients. Where you see them is where your principal place of business is.

That was the gist of the IRS ruling when it disallowed an office-at-home deduction for a cancer researcher, for example. Despite the hours that the researcher spent at home poring over scientific writings, the IRS ruled that the principal work was done at the research lab outside his home.

In a case similar to yours, the IRS ruled in favor of an office-at-home deduction by a psychiatrist who was an independent contractor. The difference, however, was that he saw patients at his home office.

What if it isn’t practical for you to see patients at your home? You might still have a shot at an allowable deduction.

The tax laws say an office-at-home deduction is allowed if you use a part of your home regularly and exclusively as your principal place of business for any trade or business in which you engage. In other words, if you could show that the medical research and bookkeeping you do at your home office is a separate business, you clearly would qualify for the deduction.

Say you contracted with one of the HMOs to do some medical research or to handle the bookkeeping for some other doctors. That would be a business separate from your patient practice and seemingly would allow you to meet the office-at-home test.

In any case, you are entitled to depreciate the books in your medical library and take that deduction regardless of whether a part of your home office qualifies as an office for tax purposes.

Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Business Section, The Times, Times Mirror Square, Los Angeles 90053.