American Jobs Creation Act of 2004 and State Income Taxes

A provision in the American Jobs Creation Act of 2004 could create an opportunity for taxpayers to reduce their state income tax bill. Section 501 of the act adds IRC section 164(b)(5), which provides that taxpayers who itemize their deductions can elect to deduct state and local general sales taxes instead of state and local income taxes paid for 2004 and 2005. The provisions of IRC section 164(b)(5) resemble the sales tax deduction that was in effect before 1987 and was repealed by the Tax Reform Act of 1986. This election presents two options: deducting the actual amount of sales tax paid during the year (the taxpayer must retain all receipts to substantiate the deduction), or using amounts from an IRS-provided table, plus any sales taxes paid on motor vehicles, boats, and other items specified by the secretary of the Treasury (the taxpayer must retain only the receipts for the purchase of such items).

Most explanations of this provision imply...