Tax Edge

By Robert Steere, Toolkit Staff Writer

Maybe you're kicking yourself now for missing the Cash for Clunkers $4,500 giveaway that took place earlier this year. Maybe you think you've missed your best opportunity to buy a new car. Don't fret. Purchasing a new vehicle (or two or three) before the end of the year could qualify you to take a special deduction on your 2009 tax return for the state and local sales and excise taxes you pay on your purchase. Be aware that use of this tax break is either now or never--it expires at the end of 2009. Also be aware that there are no limits to the number of vehicles to which the deduction applies. Therefore, if you purchase more than one vehicle, you can take the deduction for each purchase.

IRS Commissioner Doug Shulman has said, "For those thinking about buying a new car, this deduction may give them a little more drive to make their purchase this year. This deduction enables taxpayers to buy now and get cash back later on their tax returns."

What transactions qualify for the deduction? The deduction is available with respect to new vehicle purchases transacted during the period from Feb. 17, 2009 through Dec. 31, 2009. The deduction expires at the end of 2009. Qualifying new vehicles include passenger cars, light trucks, motor homes and motorcycles. Plug-in electrics, hybrids, advanced technology and alternative fuel vehicles all qualify, too, so you may qualify for an energy tax credit in addition to the deduction for sales tax. However, the original use of any vehicle must begin with you in order for the purchase to qualify. The purchase of a used vehicle does not qualify.

How much is the deduction? This deduction can be claimed for the amount of state and local sales or excise taxes imposed and paid on up to $49,500 of the purchase price of a qualifying new vehicle. In some states, this can amount to a deduction of more than $4,000. The IRS will allow the deduction even for purchases in states without a sales tax - such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon. The IRS declared that other fees or taxes that are "similar" to sales or excise taxes may be claimed for deduction in these states. To be "similar," the fee or tax must be assessed on the purchase price of the vehicle and must be based on the vehicle's sales price or as a per unit fee. In reference to the expanded deduction, Commissioner Shulman said, "This means that more people can take advantage of the deduction when they file their tax returns next year."

Who is eligible? Any taxpayer who makes a qualifying purchase is eligible for the deduction. However, income limitations restrict eligibility, practically speaking, to joint filers with modified adjusted gross incomes (MAGI) under $260,000 and other taxpayers with MAGI under $135,000. The amount of the deduction phases out as MAGI rises from $250,000 to $260,000 for joint filers and from $125,000 to $135,000 for other taxpayers. Taxpayers with higher incomes cannot claim the deduction.

How do you claim the deduction? This special deduction is available regardless of whether you itemize deductions on your return or take the standard deduction. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return, using new Schedule L to calculate and report the amount of the deduction. Those who itemize will include the deductible amount on Schedule A. You can find more information and the tax forms you need by going to the IRS web site.

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Posted December 11, 2009.