Buying a New Car? Deduct the Sales Tax!
By: Staff

By Staff
If you are shopping for a new car, the federal government wants to give you some money.

Thanks to the economic stimulus bill, also known as the American Recovery and Reinvestment Act of 2009, you may be able to deduct any state or local sales or excise tax on your federal taxes. This deduction is intended to encourage more Americans to buy cars and pump money into the struggling economy.

Here are some of the details of the tax deduction you should know:

• The deduction is only available on new car purchases, but it doesn’t matter if the car is a 2008 or 2009 model. So long as you are the first owner of the car, it is eligible.

• The deduction is available for both foreign and domestic vehicles.

• You can only take a deduction for the taxes paid on up to $49,500 of the purchase price. If the car costs more than $49,500 it still qualifies, but only that amount is considered for the deduction.

• Only new car purchases between February 16, 2009 and January 1, 2010 are eligible.

• The deduction can only be made on your 2009 taxes. Even if you are filing an amended 2008 tax return or have an extension, you cannot claim this deduction on your 2008 returns.

• New cars, SUVs, minivans, light trucks, recreational vehicles and motorcycles all qualify for this deduction. Both standard engine cars and hybrid cars alike are eligible.

• This is an “above the line” deduction, meaning it can be used whether or not you itemize other deductions on your tax return.

• There are income restrictions with this deduction. It is only available to taxpayers with a modified adjusted gross income of less than $135,000 for individual filers and $260,000 for joint filers. The deduction is phased out between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

That said, keep in mind that this is a tax deduction and not a tax credit. What that means is that this tax break does not offset your federal taxes, it lowers your taxable income. Consequently, the amount you receive depends on what tax bracket you are in.

Here’s an example of how this tax deduction works:

Suppose you buy a new car for $28,280, the average 2008 purchase price, according to the National Automobile Dealers Association. You don’t have a trade-in, so you are taxed for the full amount. The sales tax for your state is 8.25%. That means you would have to pay about $2,333 in sales taxes.

With this tax deduction, your taxable income would then be reduced by that amount. If you were in the 28% tax bracket, you would get about $653 back when you file your taxes. If additional local taxes were charged, these would also be deductible. Those in higher tax brackets benefit more from this deduction.

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