Small Business Taxes & Management

Special Report

Sales Tax Deduction for New Auto Purchase

If you missed the "cash for clunkers" deals, all is not lost. There is still some time left to cash in on the government stimulus. This time it's in the form of a tax deduction. You can deduct the sales tax on the purchase of a qualified motor vehicle. The deduction applies whether you itemize (you take the deduction in addition to your regular income tax deduction) or you take the standard deduction. As always, a number of restrictions, special conditions, etc. apply. Here's the list:

Only new vehicles qualify. You must be the vehicle's first owner. (They can be leftovers from a prior year.)
Qualified vehicles include a passenger auto, light truck, motorcycle or even a motor home.
The vehicle must have a gross vehicle weight rating of $8,500 pounds or less.
Only state and local sales taxes paid on up to $49,500 of the purchase price are deductible.
The vehicle must be purchased after February 16, 2009 and before January 1, 2010.
The credit is phased out, based on your modified adjusted gross income. The full deduction is available only to single taxes whose modified adjusted gross income is less than $125,000 and married taxpayers whose modified adjusted gross income is less than $250,000.
The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.
Purchases made in states without a sales tax -- such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon--can also qualify for the deduction. Taxpayers in states without a sales tax are entitled to deduct other qualifying fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle's sales price or as a per unit fee.
Multiple purchases are allowed. There is no limit on the number of cars for which you can claim the deduction.
There is no restriction on the country of origin. Foreign cars qualify for the deduction.

If you deduct sales tax as an itemized deduction instead of income taxes, you may add the tax on the vehicle to your sales tax table amount, but you can't double dip by adding the vehicle sales tax as a separate item.

Is it worth it? If you're already planning to replace your auto within the next year, probably. A 6 percent sales tax on a $30,000 auto would result in a $1,800 deduction. If you're in the 25 percent bracket, that's a $450 tax saving. If you're in a higher bracket and/or the sales tax rate in your state is higher, the savings will be more; conversely, if you're in a lower bracket and/or the sales tax rate is lower, the savings will be less.

You should also consider the auto market. While sales could remain lackluster for some time (meaning sales incentives may be around for some time), some deals may disappear after the new year.

Copyright 2009 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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--Last Update 10/30/09