IRS Tax Break for New Car Buyers in States Without Sales Tax

IRS Tax Breaks for New Car PurchasesThe IRS announced that its interpretation of the American Recovery and Reinvestment Act of 2009 is that new car buyers in states without a sales tax deserve a break this year.

The law seeks to stimulate economic activity by providing a 2009 Federal income tax deduction for state or local sales taxes or excise taxes paid on up to $49,500 of the purchase price of a “qualified new car, light truck, motor home or motorcycle.” A straightforward interpretation would have meant that buyers in New Hampshire, Alaska, Delaware, Hawaii, Montana, and Oregon, which have no sales tax, would have nothing to deduct.

However, as I was taught in my tax review course, the IRS code consists of rules, exceptions to rules, and exceptions to the exceptions to the rules.

The IRS has decided that Congress’ intent was that in states that don’t have state sales taxes, new car buyers should be able to deduct other fees or taxes imposed by the state or local government. The deduction is phased out for single status taxpayers with Modified AGI in excess of $125,000 and for joint filers with MAGI greater than $250K.

Taxpayers who don’t itemize can still use the tax break by adding it to the standard deduction.  However, filers who elect to take a deduction for state/local sales tax (under Code section 164(b)(5) ) instead of state/local income tax cannot take the new car sales tax deduction.

Congress is working on another tax break to encourage new car purchases:  the House recently passed a bill that would give vouchers for as much as $4,500 to people who trade in a gas guzzler for a fuel-efficient car.  The bill is thought to have a decent chance of being passed in some form by the Senate as well.

Photo by: John and Keturah

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Thomas Fisher, CFP®

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