No Clunker Required
Special sales tax benefit for autos expires end of 2009
By Kaye A. Thomas
Posted October 7, 2009
Benefit applies to light trucks, motorcycles and motor homes, too.
The "cash for clunkers" program soaked up so much attention that many people may not be aware that there's a special tax benefit still available for autos, light trucks, motorcycles and motor homes bought by the end of 2009.
This special rule allows you to deduct sales and excise tax on a qualifying purchase. Depending on your situation, you may already be in a position to deduct sales tax on your auto (or other) purchase, but this rule will make the deduction available to many people who would not otherwise qualify, or who would qualify only by giving up some other tax benefit.
Background
Generally, you have to itemize if you want to deduct state and local taxes that aren't related to a trade or business. Itemizing your deductions requires you to forgo the standard deduction. Furthermore, for 2009, you can deduct state and local sales tax, but only if you forgo the deduction for state and local income tax. Either one of these rules may deprive you of some or all of the federal income tax benefit you might otherwise receive as a result of deducting sales tax on an auto purchase.
Special rule
The American Recovery and Reinvestment Act of 2009 changes these rules, but only for qualifying purchases made from February 17, 2009 (the date President Obama signed the law) through the end of that year. Under this special rule, the deduction is expanded to include state and local excise tax as well as sales tax. The deduction is allowed as an addition to the standard deduction, which means you can claim this deduction without itemizing. And if you itemize, you can claim this deduction even if you choose to deduct state and local income tax rather than state and local sales tax.
AMT? The rules for calculating alternative minimum tax generally disallow the standard deduction and any itemized deduction for state and local tax — but not in this case. This special deduction is allowed for AMT purposes.
Limitations. As usual, there are some catches. You have to buy a new car — not necessarily the latest model, but a car with no previous owner (in other words, a purchase of a used car doesn't qualify). The deduction is limited to the state and local tax paid on the first $49,500 of your purchase, so you won't deduct the full amount of tax if your vehicle cost more than that. The deduction is phased out for taxpayers with income above specified levels (see below). And of course, there's no double dipping: you can't deduct the sales tax twice, using this rule and the regular deduction for state and local sales tax.
IRS description
Here's a full quote of the description of this rule included in an IRS publication:
In 2009, you can deduct the state or local sales and excise taxes imposed on the purchase of a qualified motor vehicle after February 16, 2009, and before 2010. A qualified motor vehicle includes a passenger automobile, light truck, or motorcycle, the original use of which begins with that purchaser and that has a gross vehicle weight rating of 8,500 pounds or less. A qualified motor vehicle also includes a motor home, the original use of which begins with that purchaser. The amount of tax you are able to deduct is limited to the tax that is imposed on the first $49,500 of the purchase price of the vehicle. The deduction is phased out over a $10,000 range that begins when modified AGI is more than $125,000 (250,000 if married filing a joint return). The new deduction can be used to increase the amount of your standard deduction or you can take it as an itemized deduction (if you are not electing to take the state and local general sales tax deduction).
Note: The reference to "modified AGI" means your earnings increased by certain amounts you may have excluded if you worked outside the United States.
Worksheet
The IRS has also provided a worksheet you can use to estimate this deduction. Most people won't need this worksheet, but we provide a link below in case you want to see how the IRS calculates the deductible portion of the tax on a purchase for more than $49,500, or how the phase-out works for higher-income taxpayers.
