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What is the New-Vehicle Sales Tax Deduction?

Find out how to qualify for a tax break on your new wheels.

By
Laura Adams, MBA
4-minute read
Episode #143

 

In this show I’ll discuss the New Vehicle Sales Tax Deduction--a tax break that’s available for most vehicles purchased after February 16th of 2009.

What is the New-Vehicle Sales and Excise Tax Deduction?

If the purchase of a new car, light truck, motor home, or motorcycle is in your budget this year, the IRS wants to steer you toward making a deal by offering a new tax break. To qualify, you must meet the following three conditions:

  1. You must purchase a vehicle sometime between February 16th and December 31st of 2009.

  2. You must purchase a passenger vehicle with a gross weight that doesn’t exceed 8,500 pounds. Motor homes are an exception--they don’t have a weight restriction.

  3. You must be the first owner of the vehicle, regardless of the model year--it can’t be used, pre-owned, or leased, to qualify.

You can claim the deduction for as many new vehicles as you’d like to buy.

How Much Can You Deduct?

You’re allowed to deduct state and local sales and excise taxes paid on qualifying vehicles, up to $49,500 of the purchase price. Here’s an example to see how the tax deduction would work: Let’s say you live in an area with 6% sales tax and you buy a new car that costs $50,000. You’d be eligible to deduct the sales tax for the maximum allowable amount of $49,500. Six percent of $49,500 is $2,970, so the deduction would reduce your taxable income by $2,970. If you were in the 28% tax bracket, the deduction would save you over $831 on your tax bill. Or if you’re due a tax refund, it would increase by that amount.

What About States With No Sales Tax?

But what if you live in a state that doesn’t charge sales tax--like Alaska, Delaware, Hawaii, Montana, New Hampshire, or Oregon? For those states, the vehicle tax deduction includes other types of taxes or fees imposed by state or local government that you might have to pay instead, on up to $49,500 of the purchase price.

Who Can Claim the Vehicle Sales Tax Deduction?

Not everyone is eligible to take the vehicle sales tax deduction. It’s only available for individual taxpayers with adjusted gross incomes below $135,000 or below $260,000 for married couples who file a joint tax return. 

Not everyone is eligible to take the vehicle sales tax deduction. It’s only available for individual taxpayers with adjusted gross incomes below $135,000 or below $260,000 for married couples who file a joint tax return.

How to Claim the Vehicle Tax Deduction

To get the vehicle sales tax deduction, you must claim it on your 2009 tax return that’s due on April 15th of 2010. You can take the deduction whether you itemize or claim the standard amount.

Should You Buy a New Vehicle?

When it comes to doing what’s best for your personal finances and saving money, buying a new vehicle is usually not on the top of the list. In general, all types of vehicles are rotten investments because they lose their value or depreciate quickly, which leaves you poorer, not richer. Plus, monthly loan payments can wreck your budget! Getting a zero interest loan or paying cash are ways to avoid paying interest and lower the overall cost, but it’s still an asset that’s doomed to dwindle in value, except in rare cases.

Don’t Go Into Over-Drive

My recommendation is not to buy a new car just because of a tax incentive. Don’t let it drive you into a deal that you don’t need or really can’t afford. Nor should you break down and buy a new vehicle, when buying a used one might be a smarter option. In other words, don’t spend thousands more on a new vehicle, instead of buying a good-quality used one, just to save a few hundred dollars on taxes. The impact of that decision would be higher monthly payments and perhaps more interest expense if you have to extend the length of a loan to make it more affordable on a monthly basis. Deduction or no deduction, always shop wisely for vehicles and bargain for the best deal possible.

However, if you’re determined to buy a new vehicle, be sure to take advantage of the sales tax deduction by completing your purchase before the end of 2009. If you already bought a qualifying vehicle after February 16th of this year and your income is below the limit I mentioned for your filing status, don’t forget to take the deduction on your 2009 return and save money on your taxes.

Administrative

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I’m glad you’re listening. Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.

More Resources:

Sales Tax and Fee Deduction for New Vehicle Purchases
Car Sales and Excise Tax Deduction: Questions and Answers

Image courtesy of Shutterstock

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.