Dear Tax Talk,

I bought a new car last year. Would I be able to add the sales tax paid for the car to the amount of optional sales tax and claim a tax deduction? What type of document do I need to send along with the tax return?

— Andy

Dear Andy,

The sales tax deduction that was originally passed in 2004 is still alive and well and has gotten better for 2009 and, to say the least, more confusing.

Previously, sales tax on the purchase of a car was only deductible as an itemized deduction on Schedule A. If you did not itemize, you could not claim the sales tax deduction.

With the tax law changes in 2009, you can still itemize the sales tax deduction for a new or used vehicle (including a boat or plane) purchased anytime during 2009 (provided you don’t deduct your state and local income taxes). As in the past, there is no specific adjusted gross income or purchase price limit when you only deduct sales taxes.

New in 2009: If you do elect to deduct your state and local income taxes, you can still itemize a sales tax deduction for a new (i.e., unused) motor vehicle(s) (but not a boat or plane) purchased after Feb. 16, 2009, on line 7 of 2009 Schedule A. Purchase price and AGI limits discussed in the next paragraph apply when deducting income and motor vehicle sales taxes. The instructions for Schedule A are quite confusing when discussing the sales tax deduction on vehicles and may lead many people to not claim the sales tax on a vehicle purchase.

Also new in 2009: If you do not itemize, you can increase your standard deduction for sales tax paid on a new motor vehicle purchased after Feb. 16, 2009. If your adjusted gross income, or AGI, is less than $125,000 (or $250,000 if filing jointly) you can claim the entire sales tax up to a per vehicle purchase price of $49,500.

Taxpayers with an adjusted gross income between $125,000 and $135,000 ($250,000 and $260,000 in the case of a married couple filing jointly), will have a proportionate reduction of the sales tax paid. Taxpayers with earned income lower than the sales tax paid also may be limited on their sales tax deduction.

The IRS has developed Schedule L for 2009 tax returns claiming an increased standard deduction from the new motor vehicle sales tax deduction or from the real estate tax deduction for nonitemizers or both. The alternative minimum tax has been conformed so that the sales tax deducted on a motor vehicle purchase by an itemizer is not treated as a preference item.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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