Daily Deduction: New Car Credit

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There may never be a better time to buy a new car. With our shaky economy, many dealers are offering rock bottom prices, low or no interest financing, and job loss protection. Even the federal government, a stakeholder in auto giants Chrysler and GM (Stock Quote: GM), has gotten into the act. For a limited time only, you, the taxpayer, can deduct some or all of the sales tax from the purchase of a new car.

The deduction gives would-be new car buyers “a little more drive to make their purchase this year,” says IRS Commissioner Doug Schulman.

The deduction is available even if you don’t itemize, and it applies to state and local sales or excise taxes paid on new vehicle purchases. Cars, trucks, motorcycles and RVs all qualify, so go ahead and buy the Airstream (Stock Quote: THO) or the hybrid that you’ve been dreaming of. If you do, you’ll get a summer of fun and a tax deduction too. But don’t buy it used: The deduction only applies to the sales tax from new vehicle purchases.

Like most tax breaks, the vehicle sales tax deduction has its limits. First, it only applies to sales tax charged on the first $49,500 of your purchase. For most of us, that’s a pretty big price tag, so the limit won’t be a problem. Second, the deduction is phased out at high levels of income. If you’re single and you earn more than $135,000, or if you’re married and you earn more than $260,000, this deduction is not for you. Finally, you can only claim the deduction if you buy your new set of wheels between Feb. 17, 2009 and Jan. 1, 2010.

Interested in other tax tips? Be sure to check out the complete archive of Daily Deductions.

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