Tax Tips: New Car Deduction

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An above-the-line deduction for state and local sales or excise tax paid on the purchase of a new “qualified” motor vehicle was a last minute addition to the American Recovery and Reinvestment Act of 2009. You can claim this new deduction whether or not you are able to itemize.

You can deduct sales or excise tax paid on a new passenger automobile, light truck or motorcycle with a “gross vehicle weight” of 8,500 pounds or less, or a new motor home, for which the original use begins with the taxpayer. It obviously does not apply to used cars. It is effective for purchases made from Feb. 17-Dec. 31, 2009. Both domestic and foreign vehicles will qualify.

The deduction is limited to the taxes paid on the first $49,500 of the purchase price. If the sales tax is 7%, the maximum deduction is $3,465.

No surprise the deduction is phased out if your Modified Adjusted Gross Income is from $125,000 to $135,000 for single taxpayers and $250,000 to $260,000 for joint filers. If your AGI is halfway through the phase-out range your allowable deduction would be cut in half.

Those who live in a state without a sales tax can deduct other fees or taxes imposed by the state or local government, subject to the same maximum and phase-out. The fees or taxes must be assessed on the purchase of the vehicle and based on the vehicle’s sales price or as a per-unit fee.

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