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New Car Tax Deduction

Want to get a tax credit for your new car? If you bought a new vehicle last year, you may be able to take advantage of the following tax credits on your 2009 taxes: deducting the amount of state and local sales and excise tax paid. You can also take further tax deductions if you donated your old car [1].

Deduct State and Local Sales and Excise Tax Paid

Even if you do not itemize your taxes [2], you can take advantage of this tax credit if you purchased a new car, light truck, motor home or motorcycle by December 31, 2009, via the American Recovery and Reinvestment Act.

Here are the specific details to determine if you qualify for the tax deduction:

  • The tax credit is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price.
  • Deductions are for qualified new cars, light trucks, motor homes or motorcycles.
  • The deduction begins a phase out at $125,000 for individual filers and $250,000 for joint filers.
  • Credit applies to vehicles purchased between Feb. 17, 2009 and December 31, 2009.

Additional Considerations

Oddly enough, purchasing new foreign cars will still reap you the same tax credits, as well as purchasing older model cars, so long as you are the first owner. Since there were probably many cars sitting on lots from 2008, I hope you scored a great deal last month.

Also, last year there were dealerships with promotions to give you a free car with a one car purchase (that’s right—buy one get one free on a car!). You would still need to pay fees and taxes, but if you found a deal like this it would be incredible, because it turns out that you can take tax deductions for as many vehicles as you purchased.

In states that do not have a sales tax, you are permitted to deduct other fees to make up for it. You can find additional information [3] from the IRS.

You can claim the tax deduction when you file your income tax return this year. TurboTax [4] will calculate the deduction as part of the questionnaire when you complete your taxes.

Update: This tax deduction expired in 2009, and was not included in the Obama Tax Cuts [5]. Therefore, you cannot claim it on your 2010 taxes.