Facts about the New Vehicle Sales and Excise Tax Deduction

Taxpayers who buy new motor vehicles this year may be entitled to a special add-on tax deduction for the sales or excise taxes on those purchases when they file their 2009 federal tax returns next year.

Taxpayers in states that do not have state sales taxes may be entitled to deduct other fees or taxes imposed by the state or local government.

Here are important facts you should know about this special add-on deduction.

1. State and local sales and excise taxes paid on up to $49,500 of the purchase price of each qualifying vehicle are deductible.  In other words, you can deduct the sales tax on multiple vehicles but only the taxes paid on up to the $49,500 limit for each vehicle is allowed.

2. Qualified motor vehicles generally include new cars, light trucks, motor homes and motorcycles. “Used” vehicles are not eligible.

3. To qualify for the deduction, the new cars, light trucks and motorcycles must weigh 8,500 pounds or less. Motor homes are not subject to the weight limit.

4. Purchases must occur after February 16, 2009, and before January 1, 2010.

5. Taxpayers who purchase new motor vehicles in states that do not have state sales taxes may be entitled to deduct other fees or taxes assessed on the purchase of those vehicles. Fees or taxes that qualify must be based on the vehicles’ sales price or as a per unit fee. These states include Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon.

6. This deduction can be taken regardless of whether buyers itemize their deductions or choose the standard deduction. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return. Those who itemize may deduct it as a separate item in the Taxes Paid section of Schedule A.

7. 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.

8. The add-on deduction for qualified motor vehicle taxes is not available to a taxpayer who elects to deduct state and local sales and use taxes in lieu of state/local income taxes as an itemized deduction. Thus, it will be necessary to decide which option best serves the taxpayer. This can be a complicated issue for higher-income individuals where the deduction might be phased out or where the vehicle is very expensive.

For more information on this topic and other key tax provisions of the Recovery Act, please give this office a call.

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