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Buy A New Automobile, Get A Deduction!
Earlier this year President Obama signed into law the economic stimulus package. I posted about how individual taxpayers are affected by the stimulus bill, and looked at some of the things they can expect to receive.
One of the things added to the bill was a temporary provision that allows people who buy new automobiles in 2009 to deduct any state and local sales and excise taxes on that purchase from their taxable income.
Details of the sales tax deduction
- Deductions available to purchasers of new cars, light vehicles, RVs or motorcycles in 2009.
- Deduct state and local taxes and any excise taxes charged on the purchase.
- Available to those earning less than $125,000 ($250,000 for joint filers).
- You can deduct the sales tax on the first $49,500 of a car purchase
This deduction will be what’s known as an above-the-line deduction, which means you can take it regardless of whether you itemize other deductions on your tax return.
An Illustration Of How The Tax Deduction Works
Let’s look at a quick example of how the tax deduction would work in the real world. Let’s say you buy a new car for $20,000 this year, and had a trade-in of $9,000. Typically states would tax the difference between the new car and the trade, which in this instance would be $11,000.
At a tax rate of 6.5%, that would mean your deduction in this case would be about $715. Tax rates vary by state, so your deduction will be based on the tax rate in your state.
If you are buying a $20,000 car with no trade, you would reduce your taxable income by $1300 (at our example 6.5% tax rate).
The estimated cost of this provision is expected to be around $1.7 billion dollars.
Still confused about how the deduction works? Check out my article answering 7 common questions asked about the new car sales tax deduction.
I’ll Still Buy Used Cars
Personally this tax deduction isn’t enough to get me excited about buying a new car. For me, buying a 2-3 year old used car and paying cash is still the only way to go! As soon as a new car gets driven off the lot, it loses a huge chunk of it’s value. When buying a depreciating asset like a car I think it’s best to cut your losses as much as you can, and buy after the biggest chunk of it’s value has already disappeared. Check out this post on Dave Ramsey’s idea of how to drive free cars and retire rich and another about things to do, and not to do, when buying a used car!
Does this tax deduction make you more likely to buy a new car this year, or will you still buy used when the time comes?
This tax deduction is a prime example of how Washington simply does not get it… let’s give a tax deduction to encourage people to go even further into debt, nevermind that debt is what caused this mess in the first place… honestly, I’m embarassed for them.
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Do you know if this applies to leases? I just leased a new car and seeing how I paid upfront sales tax, I am hoping that would qualify.
Thanks..
We just bought a used car. Didn’t even bother to wait for the stimulus package to come through. Bought what we wanted, in our price range.
The sad thing, though, is that Washington does “get” it. Washington (and many of us) are sold on an economic model in which debt-fueled consumer spending is the main growth engine. It’s the way it’s been since the 80s, and most of our leaders have bought into it.
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Sir,
I bought a new car(Toyota Sienna 2009) in Dec 30, 2008 for $30,000. Can I eligible for sales tax exemption by Obama’s stimulus pacage 2009. If I am eligible What are the paper work I have to do? Please advice.
Thanks
Sekar
I think it the credit only applies to cars bought in 2009. Sorry!
No that is not correct the stimulus says David Hyatt,spokesman for the National Automobile Dealers Assoc. “As long as you’re the first owner, he said the vehicle qualifies as new.
Pete – Quick question. Does this credit apply to new used cars? I got this question on a post I wrote on this credit and while I think leased cards are not covered, I could not find a definitive answer. Give your extensive coverage of the credits, I thought you may have seen some info.
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Everywhere I’ve read about the bill it talks about getting the credit on “new cars” only.
Any car that has been purchased and driven off the lot is no longer a new car by definition, so I’m pretty sure that anything except those brand new cars would be excluded.
Cars used as demos might be included. You should check further.
In your example you stated that the savings on a $20,000 car with no trade and a 6.5% state sales tax would be $1,300. That is incorrect. That would be the amount you could deduct from your adjusted gross income.
You are correct, I mis-stated that. It would reduce your taxable income, not give you a total savings of $1300. Fixed. Thanks!
I am confused. I bought a new car in Feb ’09.
Can I deduct my sales tax on my ’08 taxes or do I have to wait for my ’09 taxes?
09 taxes
I bought a 2009 VW Jetta 11/17/08 for $21,000 (roughly). I bought the car BRAND NEW and am the first owner. However I traded in my 2005 Toyota Rav4 and got $9,000 for it (roughly)… Do I qualify for anything??
Thanks!
Crystal
I don’t believe you do. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.
I’m 100 percent disable, I just brought a brand new 2009 Sonta.
Can I get back the sales tax, since I don’t file income tax, I’m under
the limit? You Help is greatly appreciated.
I don’t believe you can get it back – it can only be claimed as a deduction if you file 2009 taxes if I understand it correctly.
I generally agree that, all things being equal, a used car is the way to go.
However, this does not always make sense. In many cases a 2-3 year old loaded car will cost MORE than a new stripped down version of the same car. I see it all the time.
If leather, spoilers, and other ‘nice to haves’ don’t matter, by all means, buy new.
I am buying a 2009 Nissan Versa. I know there is a tax credit. However, it was explained to me by someone that you had to have over $11,000 worth of deductions before you could deduct the tax credit. Is this true or does it come off you gross taxable income? thanks
i’m not aware of that provision? From what I understand it is a deduction against your taxable income, so it reduces your taxable income by the amount.
Tax deduction? Should be a tax credit. But more importantly, why the taxable income limitation? The higher income crowd is the group that can best afford to buy a new car. Nah, let’s encourage the person that should not be buying a new car in the first place. Give them $4500 for his “clunker” and a tax deduction and saddle them with a $20K debt that they will default on and claim bankruptcy — great plan! If the government wants to truly give a boost to the car industry, it should be open to everyone.
I agree. Seems that the government isn’t truly interested in actually stimulating the economy sometimes, or encouraging responsible spending. Instead they aim to shape society, redistribute wealth, and penalize those who have been most successful. Go figure.
well the tax rebate cash for clunkers is starting to kick in. Dealers right now are offering a to match the governments incentive. Here’s hoping it works.
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I bought a car in early Feb 09 (before the 16th) but didn’t pay the taxes on it until early March. Does my purchase apply since I didn’t pay until March or is it based strictly on the purchase date?
I believe it is strictly on the purchase date – but you will want to check with the IRS on that to make sure. Let us know what you find out!
The deduction apply to leasing ?
No, it doesn’t apply to leases. sorry.
I purchased a brand new 2009 Pontiac G6 in May 2009 and paid about $1300 in taxes. I don’t end up having to pay in anything additional to taxes at the end of the year and get a return back. How does this tax deduction benefit me? Will I get some money back of what they already deducted from my paycheck? Im new to taxes and don’t know how this all works.
I have a quick questions about the specifics of the auto sales tax deduction.
I am negotiating with a dealer to purchaser a car, but I need to purchase it before the end of the year for the aforementioned tax benefits. He does not have the precise car (one with the specific options) that I want in stock. I wanted to order and pay for the car this month, and let him find the car for me. I would be willing to wait as long as two months before I take delivery. But he told me that, in order for the purchase to count as a sale for purposes of the sales tax deduction, he has to identify the VIN before the sale. (I.e., I cannot simply purchase a car with the specs I want for delivery wheneve rhe can find the car.) Is he correct?
i AM GOING PURCHASE A NEW CAR AT THE VALUE OF 104,OOO. DOES THIS APPY TO ME?
You’ll have to check above because there are income requirements as well. If you’re buying a car worth 104,000, i’m assuming you might make too much money.
Available to those earning less than $125,000 ($250,000 for joint filers).
in addition only the sales tax on the first 49,500 of the purchase price of the car is eligible for the deduction.
I purchased a car today, December 28, 2009, but may not get the sales tax paid until next week(2010). This is happening because I purchased the car in a different State than my residence and I will be paying the State Tax in my home State. Can I still take the tax deduction on my Federal Income Tax for the year 2009, as I will be actually paying the Sales Tax in 2010? I know the purchase qualifies, but I don’t know if i can deduct the Sales Tax, as I would be paying the Tax in 2010. Thanks for your assistance.
The information I’m reading says:
This deduction applies to vehicles purchased after Feb. 16, 2009 and before Jan. 1, 2010.
And I’m assuming that means you would have to have paid the sales tax/etc before that date as well – but I don’t know for sure. I’d contact the IRS for full details on your specific situation.
I bought a car this year for cash in the amount of 4,700. would I qualify for the tax credit?
Only new cars are eligible, and I’m assuming the car you bought was pre-owned? So – no, you would not be eligible.
I wonder if this tax deduction will be extended into 2010. Seems like a lot of companies and people could use it.
I leased a 2009 Honda accord in August 2009. Is the sales tax from the lease tax deductible?
The government site says:
Q: Does leasing a car or other vehicle qualify for this deduction?
A. No, leases and rentals do not qualify for this tax deduction. The law specifies that the deduction applies to the purchase of qualified new vehicles. A lease is not a purchase for the purpose of this deduction.
I am really up set! I bout a 2009 Toyota Camey and I can’t use it as a deduction. The purchase date has to be 2/16/09 till 1/1/10 I bought my car 2/14/09 just two days before. I think all cars in 2009 should be able to deduct with out having to itemize (which I don’t do)
I bought a 2009 Corolla on 2-14-09, but had to refinance it in 12-09.
Since I am the only owner, does the refinancing count?
I don’t believe the refinancing counts, I think it would be the original purchase date. I would still contact the IRS or a tax professional to be sure.
I bought a new to me 2009 Subaru (in June 2009) that was a previously leased only vehicle by one person before me with under 13,000 miles. Would I qualify for the State sales tax deduction on my 2009 Federal Return?
I remember when I bought my car in January 2009 that I had heard a news that said they were going to back this deduction up to people who bought their cars after Nov 2008. Now I am going to do my taxes and find out I cannot deduct it. Do you remember hearing this.? Was it something that had to be voted on or something? I distinctly remember it because a friend bought their car in July 09 and was upset that they did not go back further.
I hadn’t heard anything about it going back further, sorry.
I started to work Nov 2009 and bought a brandnew car Dec 30th, 2009. My sales tax was $1900. I got my W2 in the mail stating my state income tax is $127. Can I get the $1900 + 127 as tax refund? If not, can I just file the sales tax $1900 next year?
I think this stinks… I bought my new car on Jan 2, 09 and think how awful of them to forget about all of us who purchased in JAN…. Why leave out ONE month of the year? What the heck is wrong with JAN? This STINKS…
The law was passed in February, and they chose not to make the law retroactive. Because of that you got left out. Sorry!
Update… I filed my return yesterday…. My tax rep told me that the Feb date is correct for those using the EZ form however I WAS able to claim that deduction for for Hummer I bought in Jan as well as for my hubby’s motorcycle he got in Jan…. only because we ITEMIZED… So I got it afterall…. heheheheeh