Thursday, August 27, 2009

Tax on Purchase of New Vehicle

Starting on February 17, 2009, both itemizers and non-itemizers are allowed a deduction for sales and excise taxes incurred on the purchase of a new motor vehicle, motorcycle, or motor home during 2009.

Comment: Motor vehicles include passenger vehicles, light trucks, and SUVs.

If you are an itemizer, the new law expands the definition of deductible taxes to include qualified motor vehicle taxes, which are state or local sales or excise
taxes imposed on the purchase of a qualified motor vehicle. Until now, you generally could deduct these taxes only if you elected to deduct state and local sales taxes in lieu of state and local income taxes — and even then, only certain sales taxes were deductible. If you are a non-itemizer, the new law adds a new motor vehicle sales tax deduction to the standard deduction.

Comment: For both itemizers and non-itemizers, the deduction can be claimed in computing both regular tax and alternative minimum tax liability.

The deduction is not without limitations. First, the amount of tax you can deduct is limited to the tax on the first $49,500 of the purchase price. In the case of a car, truck, SUV, or motorcycle, the gross vehicle weight rating must not exceed 8,500 pounds. In addition, the deduction is phased out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($250,000 and $260,000 in the case of a joint return). Finally, the increased standard deduction is not available if you make the election to deduct sales tax rather than income taxes for the year.

Comment: A proposed deduction for car loan interest was not included in the final version of the Act.

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