Tax Edge

By Robert Steere, Toolkit Staff Writer

A rose by any other name is still a rose. That is the principle applied by the Treasury Department and the Internal Revenue Service as they recently announced that the new income tax deduction for sales tax paid on the purchase of a new motor vehicle will now be available even in states that do not have a sales tax.

Under the American Recovery and Reinvestment Act of 2009, any taxpayer who buys a new motor vehicle this year is entitled to deduct the "qualified motor vehicle taxes" on his or her 2009 income tax return. "Qualified motor vehicle taxes" are defined as "any state or local sales or excise taxes" imposed on the purchase of the vehicle.

How then, you ask, can the IRS and the Treasury Department allow a deduction for state and local sales and excise taxes in states without sales or excise taxes? Good question, but car buyers in such states as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon should certainly be pleased with this new, kinder and gentler IRS.

The IRS said that taxpayers who purchase new motor vehicles in a state without state or local sales or excise taxes are still entitled to deduct other fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle's sales price or as a per unit fee. In short, if it looks like a sales tax and smells like a sales tax, the IRS will treat it like a sales tax. A rose by any other name is still a rose. According to the IRS, Congress intended for these other fees or taxes to qualify for this special tax deduction.

For example, in Delaware, car purchasers are required to pay a document fee when registering a title with the Delaware Division of Motor Vehicles. The fee is 3.75 percent of the purchase price. "It was always Congress' intent for the document fee to be eligible," said Delaware's Senator Tom Carper. Still, it seems strange that Congress didn't just say the deduction applied to "any state or local sales or excise or other taxes" if that's what it intended all along. Besides, a "document fee" looks and smells more like a carnation.

"This special tax break is available for people purchasing a new car this year, and that can include people in states without a sales tax," said IRS Commissioner Doug Shulman. "This means that more people can take advantage of this deduction when they file their tax returns next year."

To qualify for this deduction, the new vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010. Taxpayers can claim this special deduction only on their 2009 tax returns to be filed next year. The special deduction is available regardless of whether taxpayers itemize deductions on their returns. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.

The deduction is limited to the fees or taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

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Posted June 25, 2009.