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Deducting sales tax on a new car

TAX TIP No. 27

There's nothing like sliding behind the wheel of a new car, but something comes close this tax-filing season: deducting the taxes.

Some drivers of a shiny new vehicle will be able to deduct the sales and excise taxes they paid on their new automotive purchase.

The option to claim sales taxes and add the amount you paid on a car has been available for taxpayers who itemize for years. They still get that chance on their 2009 tax returns.

But this year, filers who claim the standard deduction can add their new auto sales tax to that amount. There is a bit more work to do to get this tax break. And yes, there are some limitations.

Many taxpayers, however, will find the tax savings well worth the bit of added filing effort.

Must be new

The first restriction is that your car be new, not just new to you. Even the best used vehicles don't count for this tax break.

The type of vehicle, however, isn't limited to your standard sedan. If you buy a truck, motorcycle or motor home, that counts, too, as long as it's new.

You also aren't limited to one purchase. You can claim the sales tax on as many new vehicle purchases as you made.

In this tax tip:
  • Must be new.
  • Timing is everything.
  • Dollar limits.
  • No state sales tax, no worries.
  • More filing paperwork.

And purchase is the key word. Leases and rentals do not qualify for this tax deduction.

Timing is everything

This new tax break was part of the American Recovery and Reinvestment Act stimulus package enacted last February. Because of that, it has a specific time frame that your vehicle must meet.

Your new automotive purchase must have been made between Feb. 17, 2009, and Dec. 31, 2009. A day early or late, and you're out of tax deduction luck.

Dollar limits

There are some specific dollar limits that apply to the new vehicle sales tax deduction.

First, there's the price of the car. Only the tax paid on the first $49,500 of the vehicle counts. If you bought a more expensive new set of wheels, then you can deduct only a portion of the tax up to the cut-off amount. The excess that you pay won't help reduce your tax bill.

There's also an income limit on taxpayers who claim this deduction. It's phased out if your modified adjusted gross income last year was between $125,000 and $135,000 and you are an individual filer. The income phase-out range for married couples who file jointly is $250,000 to $260,000.

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If your earnings fall into the range, you'll get a reduced deduction. But if you make more than the maximum amount for your filing status, then you can't claim this tax break.

No state sales tax, no worries

If you live in a state with no consumer sales tax, such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon, you still get a tax break on your new vehicle purchase.

You can deduct other fees or taxes imposed by your state or local government as long as these levies are assessed on the purchase of the vehicle and are based on its sales price or as a per unit fee.

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