New Tax Deduction For Car Buyers

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Summary: New car purchases qualify for a tax deduction for the state of local sales tax. The Treasury Department announced that purchases made in states without sales tax can still qualify for the tax deduction. There are specific time limits and income requirements to be eligible for the new car sales tax deduction. Also, a tax deduction is different from a tax credit. A tax credit reduces the amount you owe the government dollar for dollar. That's to say, a $1,000 tax credit reduces your tax liability by $1,000. And, if you are in a 25% tax bracket and receive a $1,000 tax deduction, you benefit by obtaining a $250 reduction in your income taxes.

The Treasury Department announced car buyers in states that do not have a state sales tax can claim still claim a deduction for the purchase of a new motor vehicle. Under the American Recovery and Reinvestment Act, taxpayers are allowed to deduct state or local sales or excise taxes paid on new cars. Now purchases made in states that don't have a sales tax will also qualify for a deduction.

Taxpayers will be able to deduct other taxes or fees imposed by the states, based on the vehicle's sales price or as a per unit fee.

To qualify for the deduction, the vehicle must be purchased between Feb. 16, 2009 and Jan. 1, 2010. The deduction can only be claimed on the 2009 tax returns next year.

See the full press release below for more details.

Read More: Where To Start When Buying A Car

Treasury Announces Additional Tax Deductions for New Auto Purchases

WASHINGTON --The Department of Treasury today announced that a tax deduction for the purchase of new motor vehicles is available in states that do not have a state sales tax. Under the American Recovery and Reinvestment Act of 2009, taxpayers who buy a new motor vehicle this year are entitled to deduct state or local sales or excise taxes paid on the purchase. The Treasury Department has determined that purchases made in states without a sales tax–such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon–can also qualify for the deduction.

"Building on the Recovery Act, the Treasury Department is taking steps to make sure every American, in every state qualifies for a tax deduction when purchasing a new car," said Deputy Secretary Neal Wolin. "This tax deduction not only increases support for the auto industry as it seeks to rebuild, but also puts money back into the pockets of hardworking Americans."

Taxpayers who purchase a new motor vehicle in states that do not impose state sales or excise taxes are entitled to deduct other fees or taxes imposed by the state or local government that are based on the vehicle's sales price or as a per unit fee. According to the IRS and Treasury, the intent of the provision is that these other fees or taxes could qualify for purposes of the special tax deduction.

To qualify for the deduction, the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010. The special deduction is available regardless of whether taxpayers itemize deductions on their returns. Taxpayers can claim this special deduction only on their 2009 tax returns next year.

The deduction is limited to the fees or taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home, or motorcycle.

The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

Cash for Clunkers List From Edmunds

Wondering which cars qualify for the "Cash for Clunkers" program that Congress is debating this week? Edmunds.com offers a list of eligible vehicles.

Edmunds says the "Cash for Clunkers" program boils down to a few key rules:

1. It will offer no more than $4,500 to new car buyers.
2. It will require the trade-in vehicle to be crushed (which means that owners will not collect any trade-in value.)
3. Cars to be scrapped would have to have EPA combined fuel economy ratings of 18 miles per gallon or less, and the new vehicle purchased must earn better mileage.
4. The participant must have owned the “clunker” for one year.

“If you can get more than $4,500 for your vehicle, you're better off selling it or trading it in without taking advantage of the Cash for Clunkers rebate,” stated Edmunds.com Editor In Chief Karl Brauer, who addresses this topic on his blog, Karl on Cars.

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• automobile, 
• personal finance advice, 
• tax deduction, 
• taxes

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