Tax Edge

By Robert Steere, Toolkit Staff Writer

Summer is fast approaching, so vacation season is almost here. Often, summer vacations involve long-distance highway travel. If you have been pondering the purchase of a new family car in preparation for summer vacation season (or for any other reason), then you should be aware that the environment for car buying has just gotten better.

The Internal Revenue Service announced recently that taxpayers who buy a new passenger vehicle during the remainder of this year may be entitled to deduct state and local sales and excise taxes paid on the purchase when they prepare their 2009 income tax returns next year.

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

The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of any qualified new car, light truck, motor home or motorcycle. The $49,500 is a per-vehicle limitation, but the deduction is available for multiple qualified vehicle purchases. To be a qualified purchase, the vehicle must be new, and its original use must commence with you.

Obviously, the deduction is particularly valuable if you live in a state with high state and local sales taxes. If you buy a new car for $30,000 and pay 8 percent sales tax on the purchase, you will be able to take a $2,400 deduction on your 2009 income tax return.

IRS alerted taxpayers that the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010, to qualify for the deduction.

Be aware that 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. Those with modified adjusted gross income above these levels are not eligible to take the deduction.

This deduction can be used in conjunction with other benefits if you choose to purchase a car that qualifies for one of the energy efficiency tax credits. If you purchase a hybrid vehicle, alternative fuel vehicle, or plug-in electric vehicle you may be eligible for additional tax credits totaling hundreds or thousands of dollars. Make sure you check out these options.

The tax deduction for sales tax on the purchase of a qualified new vehicle is available regardless of whether a taxpayer itemizes deductions on the return. But be clear on this, the deduction can only be taken on the 2009 tax return--not on the 2008 tax return filed during 2009.

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Posted June 5, 2009.