Tax Breaks for New Cars

Even if you missed out on the “cash for clunkers” government rebate earlier this year, you can still save big by deducting the state and local taxes you pay when you buy a new car, light truck, motor home or motorcycle by December 31. (Sorry -- used vehicles don’t qualify for the sales-tax break.)

The deduction, which you claim when you file your 2009 tax return next spring, is limited to the taxes and fees paid on up to $49,500 of the purchase price of a vehicle, but there is no limit to how many vehicles you can buy. So, for example, a married couple could buy two cars and deduct the sale taxes on both. The break starts phasing out for individuals with incomes of more than $125,000 and disappears at $135,000. It’s available to married couples with incomes of up to $250,000, phasing out at $260,000.

The deduction applies to vehicles purchased from February 17, 2009, through the end of the year. The sales-tax break is set to disappear at year-end and isn’t likely to be extended.

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If you don’t itemize, you can add the sales-tax amount to your standard deduction. If you itemize, you’ll include the sales tax with your other write-offs. And if you live in one of the five states that don’t impose a state sales tax -- Alaska, Delaware, Montana, New Hampshire and Oregon--you can deduct other fees or taxes on the vehicle purchase imposed by your state or local government, as either an add-on to your standard deduction or an additional itemized deduction.

This break is of no benefit to taxpayers who itemize and choose to deduct state sales taxes instead of state income taxes (a scenario most likely in states that don’t impose an income tax). Even before the new rule took effect, they could deduct the sales tax paid on a car -- new or used -- with no purchase-price limit.