written by Andy from savingtoinvest.com
In addition to the working tax rebates and home owner tax credits, the 2009 economic stimulus package contains an Auto Assistance Ownership amendment that provides tax breaks for new vehicle buyers by giving them a federal-income-tax deduction on local sales and excise taxes, but not on the interest on loans, as was originally proposed. It enables taxpayers to buy now and get cash back later on their 2009 tax returns. It is applicable to any new vehicle purchased after Feb 17th 2009 (the date the stimulus bill was signed into law).
Here are all the eligibility criteria, based on recent IRS press releases: 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 foreign or domestic cars, SUV’s, light trucks, motor homes or motorcycles that weigh no more than 8,500 pounds. You can still buy a qualifying vehicle for more than $49,500, but you will only get a tax deduction up to the specified limit. The deduction is only available to families making less than $260,000 (or $135,000 for single filers). It 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. The new vehicle must be purchased on or after Feb. 17, 2009, and before Jan. 1, 2010, to qualify for the deduction. Purchases before Feb. 17, 2009, are not eligible for this special deduction.
How to claim the tax deduction: The deduction is available regardless of whether a taxpayer itemizes deductions on their return (Schedule A). The deduction cannot be taken on 2008 tax returns (even if they are amended or filed late), so must be claimed when they file their 2009 returns in 2010. Also, unlike other tax credits in the economic stimulus package this tax break is not an offset to your federal taxes (i.e. a tax credit), it is a deduction against your taxable income. Taxpayers who take the standard deduction need to complete Schedule L and attach it to tax forms 1040 or Form 1040A to increase the standard deduction by the allowable amount of state or local sales or excise taxes paid on the purchase of the new vehicle. Also, check the box on line 40b on Form 1040 or line 24b on Form 1040A. Individuals who itemize should include the allowable amount of state or local sales or excise taxes from the purchase of the vehicle on Form 1040, Schedule A.
To illustrate the above tax deduction, consider the following example. The average new car purchase price the first 11 months of last year was $28,280, and the average used car trade-in value was $15,203, according to data from the National Automobile Dealers Association. States typically tax the difference — $13,077 in this case. So a 5% sales tax rate would be $654, meaning the deduction would reduce taxable income that much. Each state has a different car sales tax, so the deduction will vary by state.
“This special tax break is available for people purchasing a new car this year, and that can include people in states without a sales tax,” said IRS Commissioner Doug Shulman. “This means that more people can take advantage of this deduction when they file their tax returns next year.” To qualify for this deduction, the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010. Taxpayers can claim this special deduction only on their 2009 tax returns to be filed next year. There is no restriction on the type or car and it does not have to be a Hybrid. Unlike the worker and housing tax credits, the car buyer tax break is an income tax deduction. This means that it would reduce your taxable income and hence net tax liability. So the higher your tax rate, the more you will benefit.