Incentives, Tax deduction for New Car Purchase in Stimulus Package
Updated July 2009: According to the provisions of the Economic Stimulus Package, citizens of United States will be eligible for a an incentive provided in the form of special tax break when they make a qualifying purchase of a new automobile. There are additional eligibility criterion for qualifying for this stimulus which are explained below. Moreover, an example of how exactly this tax deduction for new vehicle purchases works has also been worked out.
The law that provides this car buyer incentive by way of tax breaks is also sometimes known as Auto Assistance Ownership Amendment.
Quick Highlights of Special Car Tax Break
- Deduction for state and local sales and excise taxes paid on up to $49,500 of the purchase price of the car.
- Income limits The deduction is phased out for joint filers with modified adjusted gross income between $250,000 and $260,000 and other taxpayers with modified AGI between $125,000 and $135,000.
- The deduction is available regardless of whether a taxpayer itemizes deductions on their return (Schedule A).
- Deduction available for qualifying new cars, SUV's, light trucks, motor homes or motorcycles of maximum weight equal to 8,500 pounds. Car must be purchased on or before 17th February 2009.
- Car purchase made in states without sales tax, e.g. Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon is also eligible for additional incentive where the car buyer can deduct other fees and taxes imposed by the State Government. However these fees and taxes must be imposed on the purchase price of the car, i.e. must be proportional to the price of the car. If you are in such a state, read the IRS ruling on Car Tax deduction for States without Sales Tax.
Bad News - Special Car Tax Rebates Scaled BackThe Bad News is that the new auto incentive has been scaled down than the previously proposed version. In the first version a tax deduction for sales tax and state / excise taxes as well as interest paid on auto loan was proposed. This was however scaled down and now according to a new IRS Ruling there will be tax deduction for Sales Tax, State Tax and Excise Tax but not for interest paid on Auto Loan.
Good News - Above Car tax breaks can be used with other incentivesThe good news is that the tax deduction mentioned above (and explained below) can be used with the other two Government Incentives & Stimulus for buying a new Automobile. Thus if you are planning to buy a new automobile, you must try your best to use all three of the Government incentives mentioned below. Together they can provide thousands of dollars as rebate for your new car purchase.
- Auto Stimulus in the form of Sales tax deduction for new car purchase. Read this post in detail to understand this tax deduction incentive.
- Cash for Clunkers - If you have an old car which you want to get rid of, you have got to read my post on Cash for Clunkers ! Don't miss it.
- Hybrid Car Tax Credit - This is especially useful if you are planning to by a Hybrid. You can get thousands of dollars in tax credits and yes, this is all in addition to the incentives mentioned above. Find complete information about it on Hybrid Car Tax Credit details.
Sales Tax, State Tax and Excise Tax Deduction - how does it work?
When you make any new car purchase, the state charges an excise tax and sales tax on the purchase price of this new car. The exact amount of this local taxes charged may vary from state to state. The provision of Auto Stimulus allows you a tax deduction for the Sales Tax, State Taxes,
Example of Special Car Tax Deduction As an illustration of the above tax deduction consider the following example: Suppose you buy a car of say for $55000, and suppose the Sales Tax + State taxes on this new car add up to $1000. Since the auto stimulus mentioned above provides deduction only for taxes paid up to the price of $49500 of the car vehicle, you will have to calculate the amount of Sales Tax, State tax and Excise Tax paid on the amount $49500. In this case it comes out to be $900. Then according to the provision of Auto Stimulus, the amount of $900 is tax deductible. This car tax deduction can be claimed when you file your 2009 tax returns. In other words you can subtract $700 from your total taxable income. For exact amount of state excise/sales tax you pay for your car - it is best to ask your car dealer while buying your new car.
Eligibility Criterion - Do you Qualify for Auto Stimulus?In order to be eligible for this new car buyer stimulus you must meet the following criterion.
- Income Limits for new car tax break stimulus: The deduction is phased out for individual taxpayers with modified annual gross income between $125000 and $135000. For joint filers the deduction is phased out if the combined annual gross income is between $250000 and $260000. Thus to get full benefits of this special deduction for sales tax and auto loan, your annual income must be at most $125000 (if your are individual taxpayer and $250000 if married).
- Dates of New Car Purchase to qualify for new car stimulus: The New Car must be purchased after 17th February 2009 and before December 31, 2009. Cars purchased before 17th February 2009 are not eligible for the New car stimulus according to information released by IRS.
- Maximum new car price, car weight to qualify for new car stimulus: The above incentive or car buyer stimulus is available only for $49,500 of the purchase price as explained in the above example. Moreover the car must weigh less than or equal to $8,500 pounds (That means sport utility vehicles, light trucks, motorcycles and even motor homes qualify).
Other Federal Tax Breaks and Rebatesin 2009 Economic Stimulus Package that maybe of interest to you
The goal of providing this stimulus to car buyers is to give a boost to the ailing U.S. auto industry. All major U.S. car makers, GM, Chrysler, Ford are in deep trouble due to fall in auto sales in this current economic slowdown and hopefully this stimulus will provide the much required boost.
Update: This post was written when the details were Auto stimulus were not published yet. At that time tax deduction for the interest taken on auto loan was also under consideration. However according to the latest ruling of IRS, only Sales Tax and State taxes are eligible for tax deduction. So in the post below, ignore points about auto loan interest deduction. Thanks to all the readers whose comments pointed out the error in the previous post.
This car stimulus is also referred to by the name New Vehicle Tax Credit or Automobile Tax Credit.