Monday, May 4, 2009


An “above-the-line” deduction for state and local sales tax or excise tax imposed on the purchase of a new “qualified” motor vehicle was a last minute addition to ARRA 2009.

This deduction will apply to sales or excise tax paid on a new passenger automobile, light truck or motorcycle with a “gross vehicle weight” of 8,500 lbs or less, or a new motor home, for which the original use begins with the taxpayer. It obviously does not apply to used cars. It is effective for purchases made from February 17, 2009 (the date of enactment of ARRA 2009) through December 31, 2009. Both domestic and foreign vehicles will qualify.

The deduction is limited to the taxes paid on the first $49,500 of the purchase price. So for a car purchased in New Jersey the maximum deduction will be $3,465 (7% of $49,500).

No surprise – there is a phase-out range. It is “modified” AGI from $125,000 to $135,000 for single taxpayers and $250,000 to $260,000 for joint filers.

Taxpayers still have the option of claiming either state and local sales tax or state and local income tax as an itemized deduction on the 2009 Schedule A. You can claim the total actual sales tax paid for the year based on documentation or an amount from the Optional Sales Tax Tables based on your state of residence, income level, and number of exemptions plus the actual sales tax paid on the purchase of an auto, truck, motorcycle, motor home, boat, airplane, or materials to build a home.

However if you elect to deduct state and local income tax you cannot also claim an above-the-line deduction for sales tax on a new car.

As with any situation where you are given a choice you should calculate your tax liability in both scenarios (above-the-line sales tax deduction and state income tax deduction and deducting state and local sales tax on Schedule A) and choose the option that provides the greatest overall federal, state and local income tax savings.

You should keep in mind that if the new car deduction is truly allowed “above-the-line” it will reduce your AGI and therefore has the potential for providing numerous additional “back door” tax savings.

On the other hand, the new car deduction is phased out based on income, while the itemized deduction for state and local sales tax has no income limitation (other than the normal “read my lips” reduction of total itemized deductions).

Will this new deduction cause Americans to run out en masse and purchase expensive new cars? I doubt it. But if you have been thinking about buying a new car anyway in the near future you should do so before the end of 2009 so you can get the tax benefit.

As with any decision that involves tax considerations remember that taxes are only pennies on the dollar. While tax consequences should certainly be considered, financial consequences take precedence. Don’t let the “tax tail wag the economic dog”.



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Robert D Flach said...


Thanks for the kind words!