Tax Break: IRS Announces New Car Buyers Can Deduct Sales Tax

The IRS just announced that new car buyers can deduct the state and local sales and excise taxes on their 2009 tax returns next year, according to our furry little tax adviser.

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 vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010, and the deduction cannot be taken on your 2008 returns. For more information about how to qualify for this deduction, click here.

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  1. trunkwontopen says:

    Aw, come on. I helped stimulate the economy back in 2006. I can’t claim that?

  2. Anonymous says:

    So I can by a Hyundai now. and I loose my job I can return it to the manufacturer and still deduct the sales tax even if it was refunded to me by the manufacturer.

    Has this been thought out?

    If I know that I am going to loose my job this is a great way to game the system

    • Oranges w/ Cheese says:

      @BondPansa: Seeing as they’ll probably require proof of purchase or proof of title to deduct, you won’t have that if you return the car.

  3. noone1569 says:

    Motorcycles? Please! And what about loan interest?

    • noone1569 says:

      @noone1569: How about Edit button?

      Read Linked Article, motorcycles qualify, woot! XB12R mmmmm sunny day, want to go home . .

    • MaytagRepairman says:

      @noone1569: Motorcycle dealers in my area are folding at about the same rate as the car dealers. I often commute to work on a 250 starter bike and was looking to upgrade anyway.

      • mac-phisto says:

        @MaytagRepairman: i bet they’re hurting even more than car dealers. the first thing people start giving up when times get tough are their toys – the ones they haven’t bought yet & the ones they’re financing. plus, it’s hard securing financing for toys even in good times (many lenders don’t do motorcycle/rv/atv/boat loans) – i’d imagine many of them outright folded their toy-financing wings altogether.

  4. Shrew2u says:

    We would have bought a new car this year, anyway…but it’s nice to know we’ll have a $1k tax break awaiting us when we file next year. At least, we will if the MAGI calculation doesn’t add SEP contributions back in. [crossing fingers]

  5. Gretta Wallace says:

    I have to say, a tax deduction on the taxes for a new car is a rather spare bone to throw someone making less than $125,000 a year. Most folks (me, for example) don’t have enough itemized deductions to justify not taking the standard deduction even with mortgage interest, etc. At 7 percent sales tax on a $12,000 car equaling $840 of deductions (deductions, not credit, note) that’s hardly reason to go out and splurge. And what kind of person who needs a tax break is buying a $50,000 car (or RV) anyway?!

    • mac-phisto says:

      @grettawallace: rtfa. “The special deduction is available regardless of whether a taxpayer itemizes deductions on their return.”

    • czetie says:

      @grettawallace: Newsflash: people making under $125,000 have cars too!

      I bought a new car a month ago (fortunately, after Feb 16). It cost $20,000 and it replaces the one that has almost 150K miles on it and is starting to fall apart. The deduction will be very welcome. It’s like getting an extra 7% discount — are you saying that’s not worth having? One reason I bought now rather than try to limp along with my current car is that I knew this break was coming.

      Hmmm, maybe your personal unique circumstances are not so representative of “most people”, or even “most people” with an AGI under $125,000, that you can generalize from them?

    • lawnmowerdeth says:

      @grettawallace:
      Your standard deduction is better even with mortgage interest??? You must either have a house in Detroit or a nearly paid off loan!

  6. pecan 3.14159265 says:

    I got a car in Sept. 2008 and I don’t qualify for anything under the stimulus…I guess people who bought cars before it really hit the fan don’t matter.

    • B says:

      @pecan 3.14159265: Yes, the point of the stimulus isn’t to get people to travel back in time and buy cars, it’s to get them to buy cars now.

    • Traveshamockery says:

      @pecan 3.14159265: I bought a house in 2007, didn’t get the “first time homebuyer’s credit.” That’s the way the cookie crumbles.

    • mzs says:

      @pecan 3.14159265: I got a used car with 3K miles in the right time frame for this but before the original hints of it coming. I feel your pain. This along with the lower interest rates on new cars would have been a real factor.

      • pecan 3.14159265 says:

        @mzs: I think two weeks after I bought my car, Toyota introduced their craptastic Saved by Zero commercials. I didn’t buy a Toyota, but I figured Nissan was going the same way – yep, three months later, Nissan’s rolling out the 0% interest. Sigh.

      • I_am_Awesome says:

        @mzs:

        I hope you saved more on that used car than this tax break would net you.

        • mzs says:

          @I_am_Awesome: Oh yes, but I got a loan for the used car at 4.74% while a new Honda at the time would have been 1.9%. I also am lucky in that my warranty is expanded by a by a bit rather than shorter (Honda does remainder + 1yr) but in IL you lose some buyer protection when buying used vs new (lemon law) and the newer models have some features at the same trim level.

          This tax break would have been one of the considerations if I had known about it. Also the dealer that I bought the used one from did not want to match the carmax trade in price like the dealer with the new one. So I had to sell the Dodge to carmax, that has tax implications in IL (you have to pay tax on the sale not on a trade) and of course means we need to have enough cash, which we did, to still make a large down payment while you wait for the funds from the carmax check.

          The price on the new one was $8K more than on the used one. For that the balance tipped to the old one, with the tax in addition to the interest, lemon law, warranty, and trade-in considerations most likely the new one that was more car would have won out.

    • Christy Casper says:

      @pecan 3.14159265: Dude, me too. October 2008. Grr!

  7. adamczar says:

    I got a car in Nov 08….. sucks to that.

  8. Saboth says:

    Hmm not too shabby…if you were buying a car for 15,000, that would be a $750 tax deduction in my state (5% sales tax). And it is an above the line deduction, so even if you don’t itemize, you get it.

  9. NeverLetMeDown says:

    Well, the income ceiling and the AMT combine to make this meaningless to me, but thanks for trying IRS!

  10. Matthew Davis says:

    WOOT! I just bought a white 2009 Scion xB just last Thursday! HURRAY FOR ME!

    • mobilehavoc says:

      @Matthew Davis: Pretty sure it has to be an American car.

      • Saboth says:

        @mobilehavoc:

        I dont see that stipulation on the IRS web page.

        • Matthew Davis says:

          @Saboth: Exactly! I wouldn’t suppose it would matter what country the car came from as long as I have paid State and local taxes on the car.

      • pecan 3.14159265 says:

        @mobilehavoc: The definition of what is American these days is a little blurred, whether the Big 3 or Congress wants to admit it or not. Parts put in Chevys are coming from China and Mexico..so what makes it American? The Chevy hood ornament that was possibly made in Mexico?

        • Matthew Davis says:

          @pecan 3.14159265: Again, EXACTLY! Really nothing mass produced anymore is made in America. Car parts, computer parts even the food on your table isnt necessarily “Made in America”.

          I personally dont care if my car was made in America, or Japan in this case. I just want quality in the brands I buy, not the cheapness that many brands now have.

    • Anonymous says:

      @Matthew Davis: It has to be a “domestic” car, whatever that means in today’s world. That must be what the IRS is referring to when they use the word “qualifying.”

  11. cbosdell says:

    lame. i bought my car december 16th heh. this tax break should be for anyone who’s bought a car since the beginning of 2008 imo right before things started going downhill.

  12. Gokuhouse says:

    Nice, I just bought a new car….on January 6th!!!!!!!!!!!!!NOOOOOOOOOOOOOOOOO! So close but yet so far…

    This does not surprise me in the slightest…I usually miss out on these things.

  13. redhelix says:

    Between this news and the incentives dealers and pitching out there (0% interest??)

    I’m thinking of just selling the 2008 Focus I bought last year and buying the newer 2009 model. Hilarious, really: Buying a new car would lower my car payments.

  14. wallspray says:

    What about leased a new car? does this count?

    • mac-phisto says:

      @wallspray: i doubt it, since the leasing company really “owns” the car & you just make “rental” payments to them, but it’s certainly worth shooting an email to irs for clarification.

  15. captadam says:

    My used car purchase helped the dealer out, too, ya know. Actually, I looked at the “savings” from taxes on buying a new Civic versus the savings from buy a year-old Civic, and I still came out on top with the used one.

  16. Jeff Pierce says:

    Oh, c’mon! I bought a new car on Feb 2nd!!! WTF is up with not making it valid from Jan 1 forward? Why the random-as-hell Feb 18th cutoff??? Is Jan 1 any less part of “Tax year 2009″ than Feb 18th?? /wrists

    • PhiTauBill says:

      @Jeff Pierce: The date is effective date of the stimulus package. They want to incentivize people who are on the fence with the buying decision, not reward people who already took the plunge. I sympathize with you, though… it’s like buying somethigg the day after a sale ends or a rebate expires.

  17. Rectilinear Propagation says:

    Aww, it’s for new cars. I guess a used car wouldn’t stimulate the economy enough.

  18. NightSteel says:

    I might have to start thinking about that Mustang…

    • mac-phisto says:

      @NightSteel: or maybe it’s time you got into a real muscle car: [jalopnik.com]

      oh no i didn’t!

      • Matthew Davis says:

        @mac-phisto: Whether the Mustang or the new Camaro is the better muscle car is up for debate.

        Opinion wise though, gotta admit that new Camaro is damn sexy. Not as sexy as my 09 Scion xB, but a close second.

        • mac-phisto says:

          @Matthew Davis: i’m actually not a big fan of either, but it’s fun to keep the rivalry alive.

          @noone1569: i agree. i like the genesis a lot – entirely too few sport coupes in our marketplace. i won’t be buying one on principle, though. KORUS FTA gives them an unfair advantage in the marketplace. :(

    • Jesse says:

      @NightSteel:

      I’m actually thinking about getting a 2009 Volkswagen Jetta TDI. They qualify for a $1300 lean-burn tax credit. The above the line sales tax deduction just makes it even more enticing.

  19. slickdealer says:

    Is this only valid for brand new cars? My fiance leased a new car 3 years ago, and we are going to be purchasing it next month. Will we be able to take advantage of this tax break on the sales tax we will be paying?

  20. Jesse says:

    It’s important to note that what makes this deduction special is that it will be an above the line item on the 1040.

  21. outoftheblew says:

    I’m sure the state’s are loving this. Yay, we already have a budget shortfall and now we don’t get this revenue.

    I’m also still pissy that if you did home improvements to increase energy efficiency in 2007 and 2009, you get a tax break, but not if you did them in 2008. I’m sure you know when I replaced all the windows in my house.

    • Jesse says:

      @outoftheblew:

      The cap on a vehicle purchase is $49,500. Assuming a tax rate of 6% would generate a $2970 deduction. That is then multipled by the marginal tax rate. Let’s assume that the average marginal tax rate is 25%, that’s a total tax loss of about $743.

      You have to remember too that the profit on vehicle sales is taxed. If you can generate more sales, then that is more tax generated. I think the government comes out ahead on this one.

    • H3ion says:

      It won’t affect the states that much. The state will still get its tax but you’ll deduct it on your federal return. For those states who key off the federal return, it might reduce the income subject to tax but the effect should be marginal. Now how about states that don’t have a tax on vehicle sales or on sales at all?

  22. ideagirl says:

    I’m a bit confused, though – I already get to deduct sales and other taxes paid. Granted, I am not a tax professional, but it seems like they are giving us something we already get? What am I missing?

    • Jesse says:

      @ideagirl:

      It’s an above the line deduction. You are able to take this deduction whether or not you itemize. For those who don’t have enough deductions to itemize (don’t have a house with mortgage interest, RE taxes, etc) this will be an advantage.

      This won’t be an advantage if you live in a state with no income tax and you already itemize and take a sales tax deduction on Schedule A already.

    • czetie says:

      @ideagirl: I Am Not A Tax Professional, but this may be a bigger deal for those of us in states that have an income tax that is deductible from our income on the federal return, and are not deducting our sales tax.

      P.S. I also apologize for Jesse’s poor grammar ;-)

      • Jesse says:

        @czetie:

        Thanks. I work at a CPA firm and by late afternoon my brain is mush from preparing taxes. You should see some of my e-mails.

  23. TexasP says:

    @undefined:

    Under current rules for the 1040A form, you can deduct the sales tax paid on a leased car. Unless they change the rules, you should be able to deduct again next year. Of course, the sales tax on a lease is a lot lower than the sales tax on a purchase, so the deduction is smaller.

    The only thing that is different about this stimulus is that you don’t need to itemize to claim it.

  24. barb95 says:

    Wait, I thought we could do this already? A friend deducted the taxes on his new car a few years ago.

    • MaytagRepairman says:

      @barb95: I believe if you itemized your taxes you already had the option to do that but now it is open to everybody.

  25. verazula says:

    What exactly is a “new car”? New to me? Never owned previously?? Does it have to be a “new” 2009? How about a 2008? Clarify please!!!

    • slowinthefastlane says:

      @verazula: A “new” car is one that has never been titled and registered before. A “used” car has been titled. Note that many “dealer demos” are considered “new” because the dealer had never titled them, even though they may have a few thousand miles on them.

  26. Corporate-Shill says:

    What a wonderful idea.

    I was planning to buy a new car in 2010. Might have to move up my time table.

  27. howie_in_az says:

    Please oh please have this next year when I’m in the market for a new vehicle (like the wonderful BMW 335i)

  28. Dacker says:

    Why should most of the US get this break and not residents of sales tax-free states? We pay our fair share via a high income tax

    We should get a tax credit based on, say, a 5% sales tax rate.

  29. H3ion says:

    Can the feds give me an auto loan as well?

  30. yagisencho says:

    “The vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010″

    Wow, squeaked in on Feb 21st. Huzzah!

  31. andys2i says:

    Some more information on calculating this credit that may be useful to commenters above. Per this article ( [www.savingtoinvest.com] ) consider the following example: The average new car purchase price the first 11 months of last year was $28,280, and the average used car trade-in value was $15,203, according to data from the National Automobile Dealers Association.

    States typically tax the difference – $13,077 in this case. So a 5% sales tax rate would be $654, meaning the deduction would reduce taxable income that much.

  32. Anonymous says:

    this is ridiculous. i bought my car in january 2009…which we can all agree is IN 2009!!! i can’t claim the nearly $1,800 i spent in sales tax stimulating the freaking economy by buying a car during tough economic times because i bought it during the magical tax-deduction-less month of january?!?! freaking ridiculous.

  33. Dave Stults says:

    What about all of us who don’t pay sales tax to begin with? We’re supposed to just quietly sit back and let our income tax money flow to people who live in states that do have a sales tax? The whole idea is retarded, not only does it exclude those of us who are taxed through other means, it is unevenly rewarding all sorts of people across the country depending on their local tax structure.

    Can I opt out of federal taxes? What a boondoggle.

  34. Anonymous says:

    Well, I bought a 2008 Dealer Demo in March, it was never owned by a third party, so I’ll be darned if I’m going to miss out on the deduction just because it was moved in an out of inventory on the balance sheet.

  35. andys2i says:

    Just an update to this post based on the recent cash for clunkers program and claiming both these subsidies. It is detailed here – [www.savingtoinvest.com] , but here is the example which readers may find useful :

    For example, in most states car buyers are taxed on the amount (sales price) of the car before the cash-for-clunkers rebate ($3,500 or $4,500) is applied. So if you are buying a $45,000 car that qualifies for cash-for-clunkers, you will pay sales tax on the $45,000 price. It is on this sales price you can claim the new car tax deduction.

    Assuming your state and local sales tax rate is 6%, you’d pay $2,700 in sales tax (on the $45,000 car) which would be deductible on your federal return. Your actual tax savings would depend on your income and marginal tax rate, of course. If your marginal tax bracket is 15%, you’d multiply your deduction by 15% and get $405 in actual tax savings in our example. If you’re a higher income taxpayer in the 33% marginal bracket, the savings would be $891.