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Note: This tax credit was valid only for 2009 taxes. The credit described in this article was part of the 2009 American Reinvestment and Recovery Act (ARRA) and was only available for your 2009 tax return. The information below is provided for reference, but does not apply to your 2010 or later returns.
You can deduct the sales tax you pay on a new vehicle, if you buy it between February 17 and December 31, 2009. And you get this tax break even if you claim the Standard Deduction—as most taxpayers do—rather than itemizing deductions on your tax return.
For people who take the Standard Deduction on their 2009 returns next spring, the sales tax deduction will be added to their Standard Deduction. For example, the Standard Deduction for married couples for 2009 is $11,400. If a couple pays 6 percent 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. That $1,800 deduction could be worth as much as $450 in tax savings for a car buyer who’s in the 25 percent tax bracket.
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
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 residents 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 2010.
Deduction has limits on vehicle weight and taxpayer income
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. 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 says the deduction is 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 joint returns.
If your AGI is halfway 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 standard or itemized deductions.
As is often the case with tax legislation, some issues about the new deduction are unclear. For example, can spouses each deduct sales tax on vehicles that cost up to $49,500 or is that the limit for a couple 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?
We should know the answers well in advance of January, when the deduction will show up on tax returns for the first time.
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