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Taxpayers who buy a new car in 2009 may be able to save up to $600 on their taxes.
However, some experts warn the new tax incentive will not single-handedly turn around flagging auto sales.
"This tax incentive is not going to be the tipping point for sales," says Phil Villegas, head of dealership consultancy at Morrison, Brown, Argiz & Farra.
The Auto Ownership Tax Assistance Amendment, introduced by Sen. Barbara Mikulski, D-Md., is part of the stimulus legislation known as the 2009 American Recovery and Reinvestment Act.
The new tax incentive allows car buyers to deduct from their federal taxes the state and local sales and excise taxes levied on purchased vehicles.
The tax break will only apply to up to $49,500 of the price a car. The amount buyers can deduct will depend on the price of the car and the amount of sales tax charged by their state.
Mikulski's office calculates families will be able to save between $300 and $600 on their taxes. To be eligible for the deduction, individual taxpayers must make less than $125,000. Joint filers must make less than $250,000.
The deduction is above the line, which means that it can be taken by itemizers and nonitemizers alike. Above-the-line deductions are subtracted from the taxpayer's total income to get the adjusted gross income amount.
The end result is less taxable income and, therefore, less money shelled out to Uncle Sam.
For example, a car buyer in a state with 6 percent sales tax who drives off the lot in a new $35,000 car could be looking at reducing her taxable income by $2,100. The actual amount saved on taxes by the deduction will depend on her income and tax bracket.
Trade-in penalty
Bringing a trade-in to the table will reduce the amount of the deduction, however.
In some states, buyers who trade in a vehicle will get a sales tax credit against the appraised value of their old vehicle that can be applied to the sales tax charged on the new car.
"The sales tax on the new car is reduced by the credit. And the net sales tax that you're paying is reduced," says Sarah Marks, automotive writer and owner of Mycarlady.com, a car shopping Web site.
For new car buyers this year who do trade in a vehicle, the deduction amount will equal the amount of sales tax they paid on the sale.
Car buyers can deduct from their federal taxes the state and local sales and excise taxes levied on vehicle purchases.
2009 auto deduction
- Applies up to $49,500 of the price a car.
- Can be taken by taxpayers who itemize and those who do not.
- Eligibility restricted to individual taxpayers making less than $125,000, joint filers making less than $250,000.
"It is comparable to a lease -- you would only be able to deduct the amount of sales tax on your lease and the deduction for a trade-in will be the amount of sales tax you're actually paying this year," Villegas says.
To apply the deduction to their taxes, car buyers will need only a copy of their sales receipt when they visit their tax preparer, says Marks.
"It will show exactly how much sales tax was paid," she says.
Will the deduction help?
According to a prediction from analysts at R.L. Polk & Co., an automotive consulting firm, the tax deduction will give car buyers an average rebate of $330.
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