Tax Break for New Wheels

What’s better than that new-car smell? The smell of money! And you’ll get to enjoy both if you bought a new vehicle last year, whether it was a car, a motorcycle, a light truck or a motor home. Remember, you must buy a new car to get a tax break -- you can’t purchase a used car or lease a vehicle. And timing matters.

As long as you bought the new vehicle after February 16, 2009, through the end of the year, you may be able to deduct the state or local sales tax or excise tax. The deduction is limited to the tax you paid on up to $49,500 of the purchase price, but there is no limit on the number of eligible vehicles.

To qualify for the full deduction, your income can’t top $125,000 if you’re single or $250,000 if you’re married filing jointly. A partial deduction is available for individuals with income between $125,000 and $135,000 and for joint filers with income between $250,000 and $260,000.

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You can claim the sales-tax break on new-vehicle purchases whether or not you itemize your deductions. Itemizers claim it on Schedule A. Non-itemizers claim the deduction on the new Schedule L, “Standard Deduction for Certain Filers.”

More options for itemizers

Although the special sales-tax deduction applies only to new vehicles, itemizers may be able to deduct the sales tax they paid on new vehicles purchased on or before the February 16 start date of the new tax break, or on used vehicles they bought at any time during the year. (Sales tax paid on leased vehicles is eligible, too.) To do so, you must choose to deduct state sales taxes rather than state income taxes. In most cases, income taxes will represent the bigger deduction and are the smarter choice. But those with little taxable income, such as retirees, or residents of states with no income tax, including Florida and Texas, may want to choose the sales-tax deduction. You can base the deduction on actual receipts or use IRS tables keyed to household income, size and state. Plus, you can add sales taxes paid on big-ticket items, such as cars, boats, recreational vehicles and building materials.

Double up

If you bought a new vehicle last year and you itemize, you can harvest a double tax break: Claim an itemized deduction for your state income taxes, and claim the special deduction for sales taxes paid on your new vehicle. Of course, itemizing makes sense only if it gives you a bigger write-off than the standard deduction.