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New car buyers qualify for tax cut on 2009 return

August 9, 2009

New car buyers qualify for tax cut on 2009 return


The cash-for-old-cars rebate — I hesitate to say clunkers, since my ’04 ride apparently, technically, would qualify — isn’t the only stimulus deal out there for new car buyers.

A special tax deduction for new car buyers is available when you file your 2009 return next year. The rules break down to this:


  • The new vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010, to qualify for the federal income tax deduction. The American Recovery and Reinvestment Act of 2009 allows taxpayers to deduct state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles.


    New vehicle purchases before Feb. 17 are not eligible for this special tax break.


  • You’d be able to deduct state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new vehicle.


    There are some limits, of course, so all car buyers would not qualify.

    The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

    The good news: You would be able to get a break even if you do not itemize deductions on Schedule A.

    Robin Christian, senior tax analyst from the Tax & Accounting business of Thomson Reuters, said taxpayers need to realize that this is a temporary deduction that was part of the stimulus package.

    So if you planned to buy a car early next year, it might be better to buy in November or December instead.

    You could use the sales tax deduction and take advantage of the cash-for-clunkers deal, too. "The cash-for-clunkers rebate has no impact on the actual sales tax deduction," Christian said.

    The state impact

    In Michigan, car buyers are taxed on the amount of the cash-for-clunkers rebate. The amount of the clunkers credit is $3,500 or $4,500, and generally depends on the type of vehicle you buy and the difference in fuel economy between the new vehicle and the trade-in vehicle.

    If you are buying a $20,000 car that qualifies for cash-for-clunkers in Michigan, you will pay sales tax on the $20,000 price.

    The sales tax would apply in Michigan, just as it would on any other trade-in/purchase scenario, said Terry Stanton, spokesman for the Michigan Department of Treasury.

    How much can you save with the tax break?

    We’re not talking about huge sums of money, but it can be a nice savings.

    Say your state and local sales tax rate is 6% and the cost of the auto subject to sales tax is $45,000. You’d pay $2,700 in sales tax and be able to deduct $2,700 off your federal return in this example.

    Your actual tax savings would depend on your income and marginal tax rate, of course.

    If your marginal tax bracket is 15%, you’d multiply your deduction by 15% and get $405 in actual tax savings in our example.

    If you’re a higher income taxpayer in the 33% marginal bracket, the savings would be $891.

    Drawback: Taxpayers who might want to deduct all of their state and local sales taxes for 2009, in lieu of income taxes, won’t be able to take two deductions for the state and local sales taxes paid on a car.

    What if you want to buy a more expensive car or truck? Do you lose out completely?

    No, but you could not deduct the entire sales tax on a Ferrari.

    Christian noted that you would be able to deduct the sales taxes on the portion of the vehicle’s cost up to $49,500.

    More tax savings? If you need to buy more than one car or truck now, the tax deduction for sales tax would still apply to both vehicles. There is no limit on the number of vehicles that the sales tax break would cover.

    But again, the sales tax deduction applies to as many cars as you purchase from Feb. 17 through Dec. 31.

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