A New Tax Break for Car Buyers

Some taxpayers will be able to deduct the sales tax they pay on new vehicles they buy this year.

By Kevin McCormally, Editorial Director, Kiplinger.com

March 16, 2009

The 2009 stimulus package signed into law by President Obama includes a valuable tax break for people who buy new cars, pickups, motorcycles and motor homes.

If you buy between February 17 and December 31, 2009, you can deduct the sales tax you pay on the vehicle. You don't have to itemize to get this break: You get it even if you claim the standard deduction -- as most taxpayers do.

People who take the standard deduction on their 2009 returns next spring will actually add the sales tax amount to their standard deduction. The standard deduction for married couples for 2009 is $11,400, for example. If a couple pays 6% sales tax on a $30,000 car, they can add the $1,800 sales tax to the $11,400 and claim a standard deduction of $13,200. In the 25% tax bracket, the extra $1,800 write-off will save $450.

Taxpayers who itemize deductions will include their vehicle sales taxes with other qualifying expenses, such as state and local income and property taxes, mortgage interest, charitable contributions and medical expenses.

One group of taxpayers won't benefit from the new break, however. Itemizers who choose to deduct state and local sales taxes instead of state and local income taxes already get to deduct the sales tax paid on vehicles. The new rule does not mean they get a double deduction. The sales tax deduction choice is usually made by citizens of states that charge sales taxes but don't impose broad-based income taxes: Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.

The new deduction for sales taxes on a new car does not affect the 2008 tax return you're working on now. It applies for 2009 purchases only and will save you money when you file your 2009 return in the Spring of 2010.

The fine print. This deduction only applies to sales taxes paid on new cars and trucks -- not used ones -- that weigh less than 8,500 pounds, plus motorcycles and motor homes. And, if you buy a vehicle for more than $49,500, you can only deduct the sales tax on that amount.

One more restriction: If you make "too much" money, you don't get this new break. Congress ordered that the deduction be phased out for single taxpayers with adjusted gross income (AGI) between $125,000 and $135,000 and between $250,000 and $260,000 for married couples who file on joint returns. If your AGI is half way through the phase out zone, for example, your sales tax deduction would be cut in half. (For most taxpayers, AGI is basically taxable income before subtracting personal and dependent exemptions and the standard or itemized deductions.)

As is often the case with tax legislation, some issues about the new deduction are murky. For example, can a husband and wife each deduct sales tax on vehicles that cost up to $49,500 or is that the limit for both single taxpayers and couples couples filing a joint return? And, what if you buy two $20,000 cars? Can you deduct the sales tax on both of them, or is the deduction limited to a single vehicle?

So far, the IRS hasn't answered those questions. But we're sure we'll know well in advance of next January, with the deduction will show up on tax returns for the first time.

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