Date Posted: July 15, 2009
The American Recovery and Reinvestment Act of 2009, which went into effect in February 2009, allows state and local motor vehicle sales taxes and motor vehicle excise taxes to be taken as a deduction on your federal tax return. Any new car, light truck, recreational vehicle or motorcycle purchased between February 17 and December 31, 2009 qualifies. New vehicles of any model year qualify so long as the buyer is the vehicle's first owner.
Any vehicle sold for under $49,500 qualifies for the full deduction, but consumers may also deduct sales taxes on the first $49,500 of any vehicle sold above this price. It is considered an "above the line" (for itemizers and non-itemizers) deduction on federal tax returns. Buyers with a modified adjusted gross income of less than $125,000 or joint-filers making less than $250,000 in 2009 qualify. The special deduction is available regardless of whether taxpayers itemize deductions on their returns and can only be claimed next year on their 2009 returns.
New vehicle purchases made in states without a sales or excise tax — such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon — will also qualify for a deduction. Taxpayers in these states can deduct other fees or taxes imposed by the state or local government that are based on the vehicle's sales price or as a per-unit fee.
The actual amount of your deduction depends on your tax bracket; consult with a tax professional for more details.
Tax Credits for Hybrids and Alternative Fuel Vehicles
There are also federal tax credits available for hybrids and vehicles powered by alternative energy fuels, such as natural gas and diesel. Typically, "alt fuel" vehicles are more expensive than gasoline-powered vehicles; and the tax credit is designed to offset that extra cost. The credits listed can be used only by the original owner and will not apply to leased vehicles. Additional tax credits, deductions and incentives may exist for alt fuel vehicles from state or local agencies.
There will also be significant tax credits for plug-in hybrids purchased beginning December 31, 2009 that will extend to the first 200,000 models sold by each automaker. For more details on the stimulus package and green vehicles, see the Green Car Advisor blog entry here.
Californians Hit Hard
California's sales tax rose to 9.25 percent at the beginning of April. Although that tax is deductible this year, consumers purchasing a $30,000 car will still have to shell out $2,775 in sales tax before they can claim that deduction. The state vehicle license fee also rose in May, from 0.16 to 1.15 percent. According to the California DMV calculator, that same car will now require a $346 annual fee.