Special Tax Break for New Car Purchases in 2009

Did You Buy a New Car in 2009?

If you purchased a new vehicle before January 1, 2010, you may be able to deduct the amount of state and local sales tax and excise taxes paid on up to $49,500 of the vehicle's full cost.

You can take advantage of this special deduction even if you don't itemize by adding the value of the deduction to your standard deduction.

What Vehicles Qualify for the Tax Deduction?

To qualify for this deduction, your new vehicle must be:

1. A car, motorcycle, or light truck (up to 85,000 pounds), or a motor home (no weight limit).
2. Purchased after February 16, 2009, and before January 1, 2010.
3. A newly purchased vehicle; not used or leased.
4. Claimed on a 2009 Tax Return (a 2008 Tax Amendment is not eligible).

The deduction begins phasing out at adjusted gross incomes of over $125,000 ($250,000 for married couples filing jointly). The deduction is not available to those with an income of $135,000 ($260,000 for married filing jointly).

Remember, this special deduction is available to taxpayers regardless of whether they itemize deductions on their tax return. If you do not itemize, you must use Schedule L, Standard Deduction for Certain Filers, to claim the deduction. Don't worry; the eFile tax software will generate the correct forms for you.

Here is an example on how to apply this tax break:

Let's assume you purchased a car for $20,000 and its trade-in value was $8,000. States typically tax the difference between the new car price and the car's trade-in value; in our example, $12,000 would normally be taxed. Under this special tax break, a 5% sales tax rate, for example, would mean a $600 reduction in your taxable income. (The amount of the deduction will vary according to your state's sales tax.)

This tax deduction applies for 2009 Tax Returns filed in 2010.

What if My State Has No Sales Tax?

If you live in a state that does not collect sales tax, you may still be able to claim the deduction. Any fees you pay beyond the sales price of the car, as long as the fees are assessed on the purchase of the vehicle and based on the vehicle’s sales price (or as a per unit fee), may qualify for the tax deduction.