Claiming the Vehicle Sales Tax DeductionPeople won't need to itemize to take this deduction. Instead, the deduction will be added to a person's standard deduction. Itemizers will take this deduction in addition to the deduction for state and local income taxes. If you elect to deduct sales taxes in lieu of state and local income taxes, then the taxes paid on the car will be included along with other sales taxes you paid.
Qualifying for the Vehicle Sales Tax DeductionThe vehicle must be new (not used). The vehicle must be an automobile, light truck, or motorcycle with a gross vehicle weight rating of not more than 8,500 pounds. Motor homes and recreation vehicles also qualify (no gross vehicle weight restrictions for motor vehicles are mentioned in the law).
Additionally, the vehicle must be purchase after February 16, 2009, and before January 1, 2010.
Limitations for the Vehicle Sales Tax DeductionThe vehicle sales tax deduction is limited to the tax paid on the first $49,500 of the vehicle's purchase price. When calculating the deduction, don't include the sales tax paid as part of the purchase price of the car. If the purchase price is over $49,500, then you'll need to prorate the sales tax.
The sales tax deduction is available without further limitation for individuals with modified adjusted gross income of $125,000 or less ($250,000 for married couples filing jointly). The deduction is phased out for individuals with modified adjusted gross income of $125,000 to $135,000 ($250,000 to $260,000 for joint filers). To prorate your deduction based on this income phaseout, take the excess of your modified adjusted gross income over the threshold amount, divide by $10,000, and subtract that from the total sales tax paid on your vehicle. In other words,
ST - ( ST x (MAGI - Threshold) / 10,000 )where ST = the car sales tax paid, MAGI = your modified adjusted gross income, and Threshold = the $125,000 or $250,000 amounts based on your filing status.
Modified adjusted gross income for the purpose of the vehicle sales tax deduction is your adjusted gross income, with any foreign earned income exclusion added back in. Modified AGI also adds back any income excluded from federal taxes because they came from from sources within Guam, American Samoa, Northern Mariana Islands, or Puerto Rico.
Vehicle Sales Tax and the Alternative Minimum TaxThe deduction for car sales tax is allowed against the alternative minimum tax, even though the standard deduction is not allowed as a deduction for AMT purposes.
What about States with No Sales Taxes?The states of Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon do not impose a sales tax. Taxpayers living in these states can deduct fees, excise taxes, and other taxes that are assessed on the purchase of a vehicle. "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," according to the Internal Revenue Service.
Tax Planning Strategies for the Vehicle Sales Tax DeductionConsider having someone buy the car who qualifies for the deduction. Let's say that Chris and Shelley, an unmarried couple, want to buy a car. Chris earns under $125,00, while Shelley earns more than $135,000. Shelley won't be able to deduct the sales tax on a car, while Chris could. So if Chris buys the car, he'll be able to deduct the sales tax.
Consider purchasing rather than leasing. Purchases of new automobiles counts for the deduction, but leases do not qualify.
Don't let the sales person talk you into a higher purchase price because you can write off the sales tax. People who qualify for this deduction will likely be in the 28% tax bracket or lower. For people in the 28% bracket, their taxes will be reduced by $280 for every $1,000 spent on sales tax.