There’s nothing like sliding behind the wheel of a new car, but something comes close this tax-filing season: deducting the taxes.
Bankrate's 2010 Tax Guide
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.
- 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.
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.
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.
More filing paperwork
Finally, to claim this credit you’ll have to fill out a bit more tax paperwork.
Taxpayers who claim the standard deduction will have to complete the new Schedule L. It can be filed with either the long Form 1040 or the shorter Form 1040A. In either case, you’ll need to fill it out, check the appropriate box on your tax return (line 40b on the 1040; 24b on the 1040A) and send it along with your return. This will let the IRS know why your standard deduction amount is larger than the usual figure.
If you itemize, you’ll still use Schedule A. As in previous filing years, you’ll decide whether to claim income taxes or your state’s (and local jurisdiction’s) general sales taxes. If you opt to deduct sales taxes, check the box on line 5b.
Again as in prior years, you can add the sales tax from your auto purchase to the general sales tax amount that goes on line 5. If you use the standard sales tax tables for your state that are part of the Schedule A instructions. You’ll account for your auto sales tax on the work sheet in the instructions.
In this case, you can deduct the sales tax on any vehicle purchase, not just on a new one. You’re not limited to road vehicles. Sales tax paid on boats, airplanes, off-road vehicles and even mobile and prefabricated homes can be added here. And you don’t have to worry about a limit on your vehicle price or your income.
If, however, you opt to claim state income taxes instead, you still get to write off your new vehicle’s sales tax amount. In this case, you’ll check box 5a for income tax, then enter your new vehicle’s sales tax amount on line 7. You also need to fill out the work sheet on page two of the newly redesigned Schedule A.
Keep in mind, though, that when you claim income taxes and sales tax on a vehicle on your Schedule A, that vehicle must meet all the special rules and limitations — such as the vehicle being new, not costing too much and your income — before you can count the tax.