Sales Tax Deduction for New Car Purchases

Written by Nickel - 21 Comments

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A reader name Patrick just wrote in to point out a recent IRS press release about a special tax break for new car purchases in 2009. From the release:

“The Internal Revenue Service announced today that taxpayers who buy a new passenger vehicle this year may be entitled to deduct state and local sales and excise taxes paid on the purchase on their 2009 tax returns next year.”

While you’ve been able to deduct sales taxes for quite some time now, this deduction was previously limited to those that itemize their deductions, and you also had to make a choice between deducting your state income tax and your sales tax.

Details of the New Car Sales Tax Deduction

The deduction is limited to state local sales and excise taxes on up to $49,500 of the purchase price of a qualified new car, light truck, motor home, or motorcycle. In order to qualify, the vehicle must have been purchased between February 16, 2009 and January 1, 2010.

The deduction phases out for individual filers with modified adjusted gross income of $125k-$135k and joint filers in the $250k-$260k range. As noted above, you can claim this deduction even if you don’t itemize your deductions.

Published on March 31st, 2009 - 21 Comments
Filed under: Automotive, Taxes
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About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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Comments (scroll down to add your own):

  1. Something from the stimulus package that I actually get a little bit from. By my estimate I will get about $350 from this.

    Comment by philip — Mar 31st 2009 @ 2:43 pm

  2. Figures. I bought my new car on January 29th, and so I won’t be eligible. Awesome.

    Comment by S — Mar 31st 2009 @ 4:19 pm

  3. Ok, I see that I was able to do this before anyway since I itemize, I guess that I get nothing more than I would have without the stimulus… back to just being on the giving side of all this stimulus.

    Comment by philip — Mar 31st 2009 @ 4:29 pm

  4. philip: Yes, if you itemize *and* take the sales tax deduction, you gain nothing. But if you itemize and tax the state income tax deduction, then you come out ahead now.

    Comment by Nickel — Mar 31st 2009 @ 4:31 pm

  5. I live in Texas…

    Comment by philip — Mar 31st 2009 @ 4:32 pm

  6. …and for those that don’t understand the significance of philip’s statement, Texas doesn’t have an income tax.

    Comment by Nickel — Mar 31st 2009 @ 4:39 pm

  7. I don’t know why Texas wouldn’t collect state taxes. It pays for things like education and prisons. I know Texas is interested in at least one of these things.

    Comment by Dime — Apr 1st 2009 @ 11:14 am

  8. We run a higher consumption tax as opposed to using an income tax to pay for services. And yes we are interested in education, thanks for noticing!

    Comment by philip — Apr 1st 2009 @ 11:21 am

  9. Having previously lived in a state with no state income tax, I’m not a fan. While state tax revenue is shrinking nationwide, the impact of an economic downturn is much more dramatic in a state that depends solely on sales tax revenue.

    I’m also not crazy about the regressive nature of that sort of taxation. We came out ahead since we spend far less than we earn (hence, no state taxes on the money we didn’t spend), but those living paycheck-to-paycheck got reamed. The net effect is that those with lower income end up paying a higher percentage in taxes.

    Comment by Nickel — Apr 1st 2009 @ 11:49 am

  10. Also, Texas has huge property taxes. Consider this scenario. You have a state tax with lower property taxes. In case of a job loss, your income tax burden would shrink (because your income reduces) and since the property taxes are lower to begin with, they are manageable and you have a better shot to keep your house.

    In Texas however, in the event of a job loss, you still have to make those huge property tax payments, and the local authority still has a vested interest in raising your appraisals since it is a source of revenue.

    Makes me start to think if state income taxes aren’t such a bad deal after all (provided it leads to significant lowering of property taxes).

    Comparing apples to apples, when I compared two similarly valued properties one in TX and the other in GA, the GA house had only about 1/3 the property taxes.

    Comment by GM — Apr 1st 2009 @ 12:33 pm

  11. At least you don’t live in Illinois, where we have outrageous property taxes (about $4,500 / year on a $175,000 house), local sales taxes at about 8% (if you eat out, you’ll notice the food-and-bevarage tax at 10%), and a flat income tax rate at 3%. Our new, excellent govenor wants to raise the income tax to 4.5% (or maybe 6%). Hooray for Illinois!

    Comment by cemccon — Apr 1st 2009 @ 1:41 pm

  12. I certainly wouldn’t rush into a new car purchase simply because of a sales tax break . . .

    Comment by DDFD at DivorcedDadFrugalDad — Apr 2nd 2009 @ 8:02 am

  13. Is the credit refundable? This is often a key issue for many potential beneficiaries of any tax credit, but is almost always overlooked. If credits are not refundable, then they typically do not help the working class at all.

    Comment by Sonny — Apr 8th 2009 @ 11:40 am

  14. I can almost tolerate credit offsetting tax liability but credit should never go beyond net zero tax. ie refund.

    By the way I am just a hard working American who put in combined 160 plus hours a week with my spouse to generate my “high income’. My income is 99% from the hours I put into work, not some fancy investment return. I am just sick of getting reamed from every angle: higher tax rate, phase out of personal examption, limitation on itemized deduction, phase out of college tuition deduction, can’t contribute to Roth IRA, on and on and on. It would be nice to throw a little bone like car sales tax deduction my way. Just frustrating. Oh well, I guess I will just roll with the punches. No other choice really.

    Comment by David — Apr 12th 2009 @ 1:46 pm

  15. Well I do have a choice. I will probably not work so hard depending on where the tax rates go in the future. There is a breaking point. I will also cancel my planned new car purchase in 2009 out of protest.

    Comment by David — Apr 12th 2009 @ 1:53 pm

  16. Hi,

    Is this deduction refundable or non-refundable?

    Comment by Alexis — Apr 13th 2009 @ 2:30 pm

  17. I live in Texas. I am already able to take sales tax paid plus the sales tax on any big ticket items (cars, boats, etc.).

    If we bought a car this year, would be able to count the car purchase sales tax twice? Or, as I expect, we won’t get any additional benefit from this part of the stimulus package?

    It looks like we are not getting much benefit from this package.

    Comment by Liz F. — Apr 13th 2009 @ 2:57 pm

  18. Well at least you are not paying state income tax in Texas and get to deduct all your sales tax, not just on car purchase. Your property tax may be higher but still deductible. California has top income tax rate of 9.3% so most people deduct state income tax and cannot deduct sales tax. It makes no sense that you have to choose one or the other. Obvioulsy if you have no state income tax burden, you will “choose” to deduct your sales tax.

    This is a deduction, not a credit, so no it is not “refundable”.

    Comment by David — Apr 13th 2009 @ 8:25 pm

  19. I guess compared to Illonois, living in Long Island ain’t so bad after all…… $500k house $10k +/- taxes (65% scholl and 35% locals) based on a few factors such as year built etc….
    Wnat to get the economy going, allow all intrest on financing anythng to be written off…get the boat bulding back to whre it was…Seems everytime we start heading in the right direction you people get foled and blinded politicians…..We’re worst now then some European countries needing vais etc to leave the country,,,,Police have automatic weapons on the street…Leave it to the aclu to stir the pots on things that really don’t concern them and weaken this country…what a bunch of S-heads..

    Comment by Jim — May 18th 2009 @ 4:07 pm

  20. I have purchase new car about two month ago, I have mention to the dealer about sales tax get back and I was told that I should check with my CPA but he was not sure about that either. Car have cost me around $32,000.00 and I did pay sales tax on it , my income
    is around $60k so I am vondering would I qulified for tax back.
    I am resident of New Jersey for many years,
    Is possible that you can give me some high light on this. Thanks in advance!

    Comment by ante seput — May 31st 2009 @ 2:21 pm

  21. With all the deductions and tax breaks out there, it is made the whole new vs used car argument lopsided. I actually saw at a recent lot that after all the deduction a new camry was only 10% more expensive than a 3 year old version!

    Comment by Andy — Jul 17th 2009 @ 10:39 am

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