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Sales Tax Deductions For New Car Buyers in 2009 Obama Economic Stimulus Package

By Peter Anderson 48 Comments - The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 11, 2014.

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Quick Navigation

  • Buy A New Automobile, Get A Deduction!
  • Details of the sales tax deduction
  • An Illustration Of How The Tax Deduction Works
  • I’ll Still Buy Used Cars

Buy A New Automobile, Get A Deduction!

new-car

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?

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Last Edited: 11th February 2014 The content of biblemoneymatters.com is for general information purposes only and does not constitute professional advice. Visitors to biblemoneymatters.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.

This article is about: Economy, Refund, Taxes

About Peter Anderson

Peter Anderson is a Christian, husband to his beautiful wife Maria, and father to his 2 children. He loves reading and writing about personal finance, and also enjoys a good board game every now and again. You can find out more about him on the about page. Don't forget to say hi on Pinterest, Twitter or Facebook!

Comments

    Share Your Thoughts: Cancel reply

  1. Do You Dave Ramsey? says

    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.

    Do You Dave Ramsey?s last blog post..Focus, On What Is Yours?

    Reply
    • J Ashman says

      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..

      Reply
  2. Miranda says

    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.

    Mirandas last blog post..Book Review: The Cure for Money Madness

    Reply
  3. Sekar says

    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

    Reply
    • Peter says

      I think it the credit only applies to cars bought in 2009. Sorry!

      Reply
      • Tony says

        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.

        Reply
  4. Andy says

    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.

    Andys last blog post..US Automakers Bailout – A Bridge to Bankruptcy or a Road to Salvation

    Reply
    • Peter says

      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.

      Reply
      • John Rothschild says

        Cars used as demos might be included. You should check further.

        Reply
  5. John Rothschild says

    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.

    Reply
    • Peter says

      You are correct, I mis-stated that. It would reduce your taxable income, not give you a total savings of $1300. Fixed. Thanks!

      Reply
  6. babs says

    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?

    Reply
    • monkeyfurball says

      09 taxes

      Reply
  7. Crystal says

    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

    Reply
    • Peter says

      I don’t believe you do. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.

      Reply
  8. Earl Booth says

    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.

    Reply
    • Peter says

      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.

      Reply
  9. George says

    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.

    Reply
  10. Debra Lewis says

    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

    Reply
    • Peter says

      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.

      Reply
  11. Steve says

    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.

    Reply
    • Peter says

      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.

      Reply
  12. tax lien certificates says

    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.
    tax lien certificates´s last blog ..Tax Lien Foreclosure

    Reply
  13. kaos says

    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?

    Reply
    • Peter says

      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!

      Reply
  14. Moun says

    The deduction apply to leasing ?

    Reply
    • Peter Anderson says

      No, it doesn’t apply to leases. sorry.

      Reply
  15. Rochelle says

    I purchased a brand new 2009 Pontiac G6 in May 2009 and paid about $1300 in taxes. I don’t end up having to pay in anything additional to taxes at the end of the year and get a return back. How does this tax deduction benefit me? Will I get some money back of what they already deducted from my paycheck? Im new to taxes and don’t know how this all works.

    Reply
  16. Tim Thurtson says

    I have a quick questions about the specifics of the auto sales tax deduction.

    I am negotiating with a dealer to purchaser a car, but I need to purchase it before the end of the year for the aforementioned tax benefits. He does not have the precise car (one with the specific options) that I want in stock. I wanted to order and pay for the car this month, and let him find the car for me. I would be willing to wait as long as two months before I take delivery. But he told me that, in order for the purchase to count as a sale for purposes of the sales tax deduction, he has to identify the VIN before the sale. (I.e., I cannot simply purchase a car with the specs I want for delivery wheneve rhe can find the car.) Is he correct?

    Reply
  17. william says

    i AM GOING PURCHASE A NEW CAR AT THE VALUE OF 104,OOO. DOES THIS APPY TO ME?

    Reply
  18. Peter Anderson says

    You’ll have to check above because there are income requirements as well. If you’re buying a car worth 104,000, i’m assuming you might make too much money.

    Available to those earning less than $125,000 ($250,000 for joint filers).

    in addition only the sales tax on the first 49,500 of the purchase price of the car is eligible for the deduction.

    Reply
  19. Jim Bogard says

    I purchased a car today, December 28, 2009, but may not get the sales tax paid until next week(2010). This is happening because I purchased the car in a different State than my residence and I will be paying the State Tax in my home State. Can I still take the tax deduction on my Federal Income Tax for the year 2009, as I will be actually paying the Sales Tax in 2010? I know the purchase qualifies, but I don’t know if i can deduct the Sales Tax, as I would be paying the Tax in 2010. Thanks for your assistance.

    Reply
    • Peter Anderson says

      The information I’m reading says:

      This deduction applies to vehicles purchased after Feb. 16, 2009 and before Jan. 1, 2010.

      And I’m assuming that means you would have to have paid the sales tax/etc before that date as well – but I don’t know for sure. I’d contact the IRS for full details on your specific situation.

      Reply
  20. Michelle Wilkins says

    I bought a car this year for cash in the amount of 4,700. would I qualify for the tax credit?

    Reply
    • Peter Anderson says

      Only new cars are eligible, and I’m assuming the car you bought was pre-owned? So – no, you would not be eligible.

      Reply
  21. Andy says

    I wonder if this tax deduction will be extended into 2010. Seems like a lot of companies and people could use it.

    Reply
  22. Tamra Russell says

    I leased a 2009 Honda accord in August 2009. Is the sales tax from the lease tax deductible?

    Reply
    • Peter Anderson says

      The government site says:

      Q: Does leasing a car or other vehicle qualify for this deduction?

      A. No, leases and rentals do not qualify for this tax deduction. The law specifies that the deduction applies to the purchase of qualified new vehicles. A lease is not a purchase for the purpose of this deduction.

      Reply
  23. Charli says

    I am really up set! I bout a 2009 Toyota Camey and I can’t use it as a deduction. The purchase date has to be 2/16/09 till 1/1/10 I bought my car 2/14/09 just two days before. I think all cars in 2009 should be able to deduct with out having to itemize (which I don’t do)

    Reply
  24. Rhonda Dickerson says

    I bought a 2009 Corolla on 2-14-09, but had to refinance it in 12-09.
    Since I am the only owner, does the refinancing count?

    Reply
    • Peter Anderson says

      I don’t believe the refinancing counts, I think it would be the original purchase date. I would still contact the IRS or a tax professional to be sure.

      Reply
  25. Kathy O says

    I bought a new to me 2009 Subaru (in June 2009) that was a previously leased only vehicle by one person before me with under 13,000 miles. Would I qualify for the State sales tax deduction on my 2009 Federal Return?

    Reply
  26. Lorraine says

    I remember when I bought my car in January 2009 that I had heard a news that said they were going to back this deduction up to people who bought their cars after Nov 2008. Now I am going to do my taxes and find out I cannot deduct it. Do you remember hearing this.? Was it something that had to be voted on or something? I distinctly remember it because a friend bought their car in July 09 and was upset that they did not go back further.

    Reply
    • Peter Anderson says

      I hadn’t heard anything about it going back further, sorry.

      Reply
  27. Clarisse says

    I started to work Nov 2009 and bought a brandnew car Dec 30th, 2009. My sales tax was $1900. I got my W2 in the mail stating my state income tax is $127. Can I get the $1900 + 127 as tax refund? If not, can I just file the sales tax $1900 next year?

    Reply
  28. Kym says

    I think this stinks… I bought my new car on Jan 2, 09 and think how awful of them to forget about all of us who purchased in JAN…. Why leave out ONE month of the year? What the heck is wrong with JAN? This STINKS…

    Reply
    • Peter Anderson says

      The law was passed in February, and they chose not to make the law retroactive. Because of that you got left out. Sorry!

      Reply
      • LadyK says

        Update… I filed my return yesterday…. My tax rep told me that the Feb date is correct for those using the EZ form however I WAS able to claim that deduction for for Hummer I bought in Jan as well as for my hubby’s motorcycle he got in Jan…. only because we ITEMIZED… So I got it afterall…. heheheheeh

        Reply
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