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More People Qualify for Car-Tax Deduction


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The Treasury Department and the IRS have recently declared that taxpayers in all states who buy new cars and other types of motor vehicles during a predetermined time period this year are eligible to deduct excise taxes paid on the purchase.

Some people who thought they weren't eligible for a new tax break might qualify after all.

A law enacted earlier this year allows many taxpayers who buy new cars and other types of motor vehicles during a certain time period this year to deduct the state or local sales taxes, or excise taxes, paid on the purchase. That may sound fairly simple, but it isn't.

For example, what about taxpayers who live in states that don't impose a state sales tax?

The Treasury Department and the Internal Revenue Service recently decided that "purchases made in states without a sales tax -- such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon -- can also qualify for the deduction."

How so? Taxpayers who buy a qualified new motor vehicle in states without sales taxes "are entitled to deduct other fees or taxes imposed by the state or local government," the IRS said. The fees or taxes that qualify "must be assessed on the purchase of the vehicle and must be based on the vehicle's sales price or as a per-unit fee."

For example, says IRS spokesman Eric Smith, Delaware imposes a "document fee that is deductible as a sales tax under this new provision." The fee "is collected on the sale of a vehicle and is 3.75% of the sales price," he says.

"This means that more people can take advantage of this deduction when they file their tax returns next year," says IRS Commissioner Doug Shulman.

To qualify, the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010. Buyers can claim this special deduction only on their 2009 tax returns to be filed next year, whether or not they itemize deductions.

One caveat: The amount of the deduction "is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers," according to the IRS.

Also, the IRS says the deduction is limited to the fees or taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle.

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