Buy A New Automobile, Get A Deduction!
Earlier this year President Obama signed into law the economic stimulus package. I posted about how individual taxpayers are affected by the stimulus bill, and looked at some of the things they can expect to receive.
One of the things added to the bill was a temporary provision that allows people who buy new automobiles in 2009 to deduct any state and local sales and excise taxes on that purchase from their taxable income.
Details of the sales tax deduction
- Deductions available to purchasers of new cars, light vehicles, RVs or motorcycles in 2009.
- Deduct state and local taxes and any excise taxes charged on the purchase.
- Available to those earning less than $125,000 ($250,000 for joint filers).
- You can deduct the sales tax on the first $49,500 of a car purchase
This deduction will be what’s known as an above-the-line deduction, which means you can take it regardless of whether you itemize other deductions on your tax return.
An Illustration Of How The Tax Deduction Works
Let’s look at a quick example of how the tax deduction would work in the real world. Let’s say you buy a new car for $20,000 this year, and had a trade-in of $9,000. Typically states would tax the difference between the new car and the trade, which in this instance would be $11,000.
At a tax rate of 6.5%, that would mean your deduction in this case would be about $715. Tax rates vary by state, so your deduction will be based on the tax rate in your state.
If you are buying a $20,000 car with no trade, you would reduce your taxable income by $1300 (at our example 6.5% tax rate).
The estimated cost of this provision is expected to be around $1.7 billion dollars.
Still confused about how the deduction works? Check out my article answering 7 common questions asked about the new car sales tax deduction.
I’ll Still Buy Used Cars
Personally this tax deduction isn’t enough to get me excited about buying a new car. For me, buying a 2-3 year old used car and paying cash is still the only way to go! As soon as a new car gets driven off the lot, it loses a huge chunk of it’s value. When buying a depreciating asset like a car I think it’s best to cut your losses as much as you can, and buy after the biggest chunk of it’s value has already disappeared. Check out this post on Dave Ramsey’s idea of how to drive free cars and retire rich and another about things to do, and not to do, when buying a used car!
Does this tax deduction make you more likely to buy a new car this year, or will you still buy used when the time comes?
Related Articles From Bible Money Matters- 7 Common Questions About The 2009 New Car Sales Tax Deduction
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This tax deduction is a prime example of how Washington simply does not get it… let’s give a tax deduction to encourage people to go even further into debt, nevermind that debt is what caused this mess in the first place… honestly, I’m embarassed for them.
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Do you know if this applies to leases? I just leased a new car and seeing how I paid upfront sales tax, I am hoping that would qualify.
Thanks..
We just bought a used car. Didn’t even bother to wait for the stimulus package to come through. Bought what we wanted, in our price range.
The sad thing, though, is that Washington does “get” it. Washington (and many of us) are sold on an economic model in which debt-fueled consumer spending is the main growth engine. It’s the way it’s been since the 80s, and most of our leaders have bought into it.
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Sir,
I bought a new car(Toyota Sienna 2009) in Dec 30, 2008 for $30,000. Can I eligible for sales tax exemption by Obama’s stimulus pacage 2009. If I am eligible What are the paper work I have to do? Please advice.
Thanks
Sekar
I think it the credit only applies to cars bought in 2009. Sorry!
No that is not correct the stimulus says David Hyatt,spokesman for the National Automobile Dealers Assoc. “As long as you’re the first owner, he said the vehicle qualifies as new.
Pete – Quick question. Does this credit apply to new used cars? I got this question on a post I wrote on this credit and while I think leased cards are not covered, I could not find a definitive answer. Give your extensive coverage of the credits, I thought you may have seen some info.
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Everywhere I’ve read about the bill it talks about getting the credit on “new cars” only.
Any car that has been purchased and driven off the lot is no longer a new car by definition, so I’m pretty sure that anything except those brand new cars would be excluded.
Cars used as demos might be included. You should check further.
In your example you stated that the savings on a $20,000 car with no trade and a 6.5% state sales tax would be $1,300. That is incorrect. That would be the amount you could deduct from your adjusted gross income.
You are correct, I mis-stated that. It would reduce your taxable income, not give you a total savings of $1300. Fixed. Thanks!
I am confused. I bought a new car in Feb ‘09.
Can I deduct my sales tax on my ‘08 taxes or do I have to wait for my ‘09 taxes?
09 taxes
I bought a 2009 VW Jetta 11/17/08 for $21,000 (roughly). I bought the car BRAND NEW and am the first owner. However I traded in my 2005 Toyota Rav4 and got $9,000 for it (roughly)… Do I qualify for anything??
Thanks!
Crystal
I don’t believe you do. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.
I’m 100 percent disable, I just brought a brand new 2009 Sonta.
Can I get back the sales tax, since I don’t file income tax, I’m under
the limit? You Help is greatly appreciated.
I don’t believe you can get it back – it can only be claimed as a deduction if you file 2009 taxes if I understand it correctly.
I generally agree that, all things being equal, a used car is the way to go.
However, this does not always make sense. In many cases a 2-3 year old loaded car will cost MORE than a new stripped down version of the same car. I see it all the time.
If leather, spoilers, and other ‘nice to haves’ don’t matter, by all means, buy new.
I am buying a 2009 Nissan Versa. I know there is a tax credit. However, it was explained to me by someone that you had to have over $11,000 worth of deductions before you could deduct the tax credit. Is this true or does it come off you gross taxable income? thanks
i’m not aware of that provision? From what I understand it is a deduction against your taxable income, so it reduces your taxable income by the amount.
Tax deduction? Should be a tax credit. But more importantly, why the taxable income limitation? The higher income crowd is the group that can best afford to buy a new car. Nah, let’s encourage the person that should not be buying a new car in the first place. Give them $4500 for his “clunker” and a tax deduction and saddle them with a $20K debt that they will default on and claim bankruptcy — great plan! If the government wants to truly give a boost to the car industry, it should be open to everyone.
I agree. Seems that the government isn’t truly interested in actually stimulating the economy sometimes, or encouraging responsible spending. Instead they aim to shape society, redistribute wealth, and penalize those who have been most successful. Go figure.
well the tax rebate cash for clunkers is starting to kick in. Dealers right now are offering a to match the governments incentive. Here’s hoping it works.
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I bought a car in early Feb 09 (before the 16th) but didn’t pay the taxes on it until early March. Does my purchase apply since I didn’t pay until March or is it based strictly on the purchase date?
I believe it is strictly on the purchase date – but you will want to check with the IRS on that to make sure. Let us know what you find out!
The deduction apply to leasing ?