New Car Incentives AUTO STIMULUS explained: Sales Tax deduction, Rebate

Incentives, Tax deduction for New Car Purchase in Stimulus Package

New Car Stimulus Incentives
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

  1. Deduction for state and local sales and excise taxes paid on up to $49,500 of the purchase price of the car.
  2. 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.
  3. The deduction is available regardless of whether a taxpayer itemizes deductions on their return (Schedule A).
  4. 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.
  5. 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 Back

The 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 incentives

The 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.
  1. Auto Stimulus in the form of Sales tax deduction for new car purchase. Read this post in detail to understand this tax deduction incentive.
  2. 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.
  3. 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?


New car incentive: State Excise Tax Sales tax Auto Loan tax deductionWhen 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, and interest on Auto Loan that you pay on your new car.

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.
  1. 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).
  2. 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.
  3. 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 Rebates

in 2009 Economic Stimulus Package that maybe of interest to you

  • Hybrid Car Tax Credit
  • Cash for Clunkers - Is it Useful?
  • Will there be a Second Stimulus Plan in 2009 or 2010?
  • 2009 Obama Stimulus Package details explained.
  • New Car Purchase Auto Stimulus details explained- Excise and Sales Tax deduction for new purchase of new vehicles.
  • Cars- Cash for Clunkers - Car tax credit when you trade your old fuel inefficient car for a new one and get a rebate of $3500 or $4500.
  • $8000 First Time Home Buyer Tax Credit details- 2009 Housing Stimulus Bill in Economic Plan proposed by Obama.
  • $800 Making work pay tax credit stimulus- details explained ($400 working tax credit for individuals and $800 tax credit for married taxpayers).
  • $250 Social Security Stimulus Check in 2009 Economic Stimulus Package.
  • 2009 Cobra Stimulus Package 65% Reduction in Cobra Health Insurance Premium for qualifying individuals.
  • 2009 Stimulus Checks? Economic Stimulus Payment
  • $1000 Child Tax Credit, Dependent Tax Credit 2009 extension.

  • 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.

    Feb 18, 2009

    44 comments:

    M February 20, 2009 at 1:22 AM  

    8 and before december of 2008? i think there's a misprint here

    Anonymous February 24, 2009 at 1:59 AM  

    If you read the Act(page 192, Division-B, Title I, section 1008), it states that the exise/state tax deduction is "Effective" from the date of the enactment of the bill until December 31, 2009. Not retro-active to November of last year.

    Also, the Act says nothing in regards to deducting interest from any loan taken for the purchase of a new vehicle.

    These were things originally talked about, but never made it into the actual stimulus plan.

    used car dealer February 25, 2009 at 11:09 AM  

    Really Obama's Economic stimulus package contains incentives for making a new car to purchase in the form of tax breaks and also tax deductions for the car buyer it is very good

    iinvestor February 26, 2009 at 12:56 AM  

    Table of Sales Tax, other State Tax rates
    Does anyone have a list or a reference where i can find how much sales tax and excise tax is charged by the different states? Perhaps such a list will help readers of this post to determine how much are they going to gain from the car buyer stimulus provided in terms of auto loan deduction and sales tax deduction mentioned above.

    iinvestor February 26, 2009 at 1:12 AM  

    State Sales Tax rates
    Ok I found one, this site has a list of sales tax charged by different states - (please check the above mentioned site or other source you trust for erros and inaccuracies.

    * Alabama Sales Tax Rate 4
    * Alaska Sales Tax Rate none
    * Arizona Sales Tax Rate 5.6
    * Arkansas Sales Tax Rate 6
    * California Sales Tax Rate 7.25
    * Colorado Sales Tax Rate 2.9
    * Delaware Sales Tax Rate 6
    * Florida Sales Tax Rate none
    * Georgia Sales Tax Rate 6
    * Hawaii Sales Tax Rate 4
    * Idaho Sales Tax Rate 6
    * Illinois Sales Tax Rate 6.25
    * Indiana Sales Tax Rate 6
    * Iowa Sales Tax Rate 5
    * Kansas Sales Tax Rate 5.3
    * Kentucky Sales Tax Rate 6
    * Louisiana Sales Tax Rate 4
    * Maine Sales Tax Rate 5
    * Maryland Sales Tax Rate 6
    * Massachusetts Sales Tax Rate 5
    * Minnesota Sales Tax Rate 6
    * Mississippi Sales Tax Rate 6.6
    * Missouri Sales Tax Rate 4
    * Montana Sales Tax Rate none
    * Nebraska Sales Tax Rate 5.5
    * Nevada Sales Tax Rate 6.5
    * New Hampshire Sales Tax Rate none
    * New Jersey Sales Tax Rate 7
    * New Mexico Sales Tax Rate 5
    * New York Sales Tax Rate 4
    * North Carolina Sales Tax Rate 4.25
    * North Dakota Sales Tax Rate 5
    * Ohio Sales Tax Rate 5.5
    * Oklahoma Sales Tax Rate 4.5
    * Oregon Sales Tax Rate none
    * Pennsylvania Sales Tax Rate 6
    * Rhode Island Sales Tax Rate 7
    * South Carolina Sales Tax Rate 6
    * South Dakota Sales Tax Rate 4
    * Tennessee Sales Tax Rate 7
    * Texas Sales Tax Rate 6.24
    * Utah Sales Tax Rate 4.65
    * Vermont Sales Tax Rate 6
    * Virginia Sales Tax Rate 5
    * Washington Sales Tax Rate 6.5
    * West Virginia Sales Tax Rate 6
    * WISCONSIN Sales Tax Rate 5
    * Wyoming Sales Tax Rate 4
    * District of Columbia Sales Tax Rate 7.5

    iinvestor February 26, 2009 at 2:59 AM  

    Do you qualify for Car buyer Stimulus - tax deduction for state sales excise tax and auto loan?

    - The new auto stimulus is not available for leased cars. Only for purchase of new cars.

    - You do not qualify for the new car buye stimulus if you have purchased your car in 2008 since the stimulus bill was passed in 2009.

    iinvestor February 26, 2009 at 10:54 PM  

    Information on New Car stimulus released (sales tax auto loan deduction) by IRS
    You may want to look at the information released by IRS on the new auto stimulus directly on this IRS website.

    iinvestor February 26, 2009 at 10:57 PM  

    2009 Car Stimulus - deduct auto loan interest sales tax
    I forgot to mention the following additional information not mentioned above. The deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A. again can be found directly on the IRS website mentioned in the comment above.

    RDBrit March 2, 2009 at 3:10 AM  

    Say in 2008 I filed with itemized deductions and used the IRS's General Sales Tax table. Already I could also add to that amount the amount of tax on a major purchase like a car.
    So, where then is the stimulus advantage in 2009?

    Anonymous March 8, 2009 at 12:36 AM  

    What about cars valued over the limit? Can you deduct taxes on UP TO the 49K?

    By the way, California just votes to raise tax and DMV charges starting next month.

    calgirl March 8, 2009 at 7:57 AM  

    Hi there, I'm not very knowledgeable about tax deductions and was hoping someone could help me understand. If I purchase a new car that qualifies me for $3000 in tax deductions, what does this translate to... How do I figure out how much more I'll get back or how much less I'll have to shell out? Thanks in advance!

    cjh104 March 12, 2009 at 12:33 AM  

    The tax break is fine. But what about us who are retired and basely don't need that tax break because we don't make enough income. Why should we purchase a car.

    Anonymous March 12, 2009 at 8:22 PM  

    What about buying a used boat? Any stimulus money available for this purchase? scshepherd@aol.com

    Erin March 16, 2009 at 9:06 AM  

    FYI: Parts of California sales tax is 8.25 (i.e. in LA county).



    Q: What if I bought/financed a used 2009 Toyota Corolla a week ago (it had 6k miles on it).... does that mean the car is "New" or "Used" to the gov't ????? Thank in advance for any answers you can give me :)

    Anonymous March 16, 2009 at 11:54 PM  

    is it that you can only claim the interest and excise tax when you file your 2009 return? what about your 2010 return b/c u will still have to pay for both then?

    Anonymous March 17, 2009 at 12:05 AM  

    does that mean that you can claim your excise tax and interest for the remander of your loan if you purchase within that time frame

    Chris March 19, 2009 at 6:07 PM  

    what if one purchases a leftover 2008 model, as a new car, in 2009?

    can the tax dedcution be applied?

    Anonymous March 22, 2009 at 12:00 PM  

    Hey why can't I qualify for the new car tax break? I bought a 2009 model in October 2008, in short stimulating the economy even before the government acted.

    Peter March 24, 2009 at 12:25 AM  

    To my knowledge (and I currently work at a dealership), a car is still new if it hasn't yet been titled. So for 2008 cars with less than 5000 miles on them which haven't been titled yet, I believe they'd still fall under the category of "new" and you'd be eligible for the deduction.

    Anonymous March 25, 2009 at 4:46 PM  

    per the irs website you can deduct the tax, BUT NOT THE INTEREST PAID as this site says
    http://www.irs.gov/newsroom/article/0,,id=204519,00.html

    Anonymous March 30, 2009 at 6:50 AM  

    So the 2009 car that I bought on Jan 29, 2009 doesn't qualify even though I paid tax on it and financed it too... The article I read said it does not apply to cars purchased before Feb. 17, 2009. Sounds like our politicians were right on the ball with this one too. Why couldn't they make it for all new new car purchases and not exclude anyone. I'd like to know which "representative" had the date included in the law... Seems to me that whenever someone in Congress comes up with a good idea by time they're finished with it it's only half a good idea.

    Anonymous March 31, 2009 at 3:13 AM  

    Bought a car feb 1...figures...What's the deal with the 17th of Feb as the start? I guess I didn't do my part.

    Anonymous March 31, 2009 at 9:03 PM  

    How long does the interest deduction last? If a loan is taken for say 5 years, is the interest deduction vaild for all 5 years or just the interest paid in 2009?

    Anonymous April 2, 2009 at 10:01 PM  

    I bought my 2009 model on November 25, 2008 and can I get tax deduction this year?

    Anonymous April 3, 2009 at 7:25 PM  

    IInvestor>>>>> check your information. It is bogus. you should edit your original post. You are misleading your readers. There is not deduction for the interest.

    Anonymous April 7, 2009 at 1:06 AM  

    You list my state, Florida, as not having a sales tax. That is not correct. The state sales tax is six percent. Counties have the option of getting an additional one percent. Therefore the sales tax is between six and seven percent.

    Anonymous April 11, 2009 at 3:23 AM  

    Oh, I bought a 2009 car in 2008 ... I should have waited ... but if I had, they wouldn't have passed this thing that sounds good but is just more socialism ... Oh, we're not coming out of this well.

    Anonymous April 13, 2009 at 1:22 AM  

    OK, so we just bought a 2007 model yesterday. It has less than 3000 miles on it, so the manufacturer's warranty is still good, etc. I can't find anything about what model year qualifies as a "new car" purchase - only the weight, dates, etc. I even looked at the IRS website. Anyone have a good link for this sort of information? Thx.

    Anonymous April 14, 2009 at 11:17 PM  

    ugh! I bought on FEB 15!!! why can't they make this retroactive to all of 2009?

    Anonymous April 16, 2009 at 6:00 AM  

    I don't know why you are getting excited. You are saving 10-20% of 5% of the purchase price...doesnt make me want to purchase.

    Anonymous May 8, 2009 at 4:34 PM  

    I bought my new car at the beginning of 2009. I am still going to claim the sales tax deduction. After all they are allowing first time homebuyers an $8000 tax credit for anyone who purchased their home from the beginning of the year and not from February 17th. Why? How is buying a home at the beginning of the year any different from purchasing a car when it comes to stimulating the economy?

    Anonymous May 12, 2009 at 4:13 AM  

    The sales tax in Ohio varies from county to county...mine is 7%

    Does this stimulus apply to all new cars or just American cars from the big 3?

    Anonymous June 12, 2009 at 7:41 PM  

    Any new cars, include imported cars?

    Anonymous June 13, 2009 at 5:46 PM  

    You people need to proof your work better:
    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, according to CCH, a tax information service).

    Since when is weight quantified in dollars??

    Anonymous June 22, 2009 at 12:56 AM  

    So if i buy a car that is worth more than $49,500 say $52,000, will i still get the tax credit up to $49,500???

    Investo Blog June 22, 2009 at 9:23 AM  

    Yes. If you buy a car which costs more than USD 49500, say $52000, then you will be eligible for state and sales tax deduction on upto $49500 of the purchase value of car. The following is a sentence copy pasted from IRS webpage http://www.irs.gov/newsroom/article/0,,id=205863,00.html The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle.

    Remember that there are income limits to be eligible for this new car stimulus. The modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers in order to be eligible for the auto stimulus.

    Anonymous June 27, 2009 at 10:12 AM  

    There is some confusion here about deducting sales taxes. Anyone who itemizes deductions can do that and add in the tax on a major purchase like a car. But if you do that, you cannot deduct your state income tax. So most people do not do that, since their state income tax is usually more, unless they live in a no-tax state like FL or TX. But, if you do not itemize, or live in a state with income tax, this new stimulus deduction is an additional bonus. If you deduct the 6% sales tax on say, a $25,000 car, which is $1,500, you will decrease the income on which you pay tax by $1,500. So if you are in a 30% tax bracket, for example, this will save you $450.

    Nenellia July 11, 2009 at 9:43 PM  

    One of the articles I read said the new car being bought must be on the dealer's lot. My original intension was to get my new car with factory tinting so I guess that wont apply?

    Laura July 23, 2009 at 10:30 PM  

    "One of the articles I read said the new car being bought must be on the dealer's lot. My original intension was to get my new car with factory tinting so I guess that wont apply?"
    I don't see this anywhere in the IRS materials. If you are concerned, you should look at the law itself, not an article about it. I would rely on the IRS publication though, which is silent on that issue. Pub 553. As far as I can tell, it applies to any new vehicle, regardless of when or where it is built. New vehicle, under the IRS definition, means original use begins with the taxpayer. That means not used by anyone else for its original intended purpose. I believe this was an issue back when they came up with "bonus" depreciation. An argument was made for dealer demo cars. They obviously have some miles on them, but have never been titled or registered. I believe, but do not have a reference handy, that original use intended to apply to the first purchaser to use it as intended. This would include demo cars, as they are still unused as intended when purchased, and never titled or registered.

    Andy August 11, 2009 at 6:40 AM  

    Do you know if this credit is being extended into 2010? Been getting a lot of questions on this, but cannot find answers

    Laura February 23, 2010 at 9:13 PM  

    What if one purchases a leftover 2008 model, as a new car, in year 2009?

    Can the tax dedcution be applied?

    digger derrick March 15, 2010 at 7:25 PM  

    too bad this doesn't apply to use cars

    Used Bucket Trucks April 6, 2010 at 12:21 AM  

    Hoping to at least get in on the housing tax credit...that'd be really nice!

    car broker November 17, 2010 at 2:35 PM  

    Also, the Act says nothing in regards to deducting interest from any loan taken for the purchase of a new vehicle.

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