Special Tax Break for New Car Purchases in 2009

If you purchased or plan on purchasing a new passenger car, light truck, motorcycle, or motor home in 2009, you might be able to deduct state and local sales and excise taxes from that purchase on your 2009 tax return (due in 2010).

To qualify for this deduction, the new vehicle must be purchased between February 16, 2009 and January 1, 2010.

This deduction is not eligible for your 2008 tax return and does not apply for leased or used cars.

The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home, or motorcycle.

If the car's purchase price is above $49,500, you will only get a tax deduction of up to the specified limit.

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.

This special deduction is available to taxpayers regardless of whether they itemize deductions on their return.

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 the 2009 tax return to be filed in 2010.