Sales tax deduction and "cash-for-clunkers" aim to boost car sales

The federal government has some valuable incentives to encourage new car and truck sales. The IRS recently announced that taxpayers in states without a sales tax can take advantage of the temporary motor vehicle sales tax deduction. Taxpayers may also be eligible for tax-free vouchers when they trade-in an old gas-guzzling "clunker."

Sales tax deduction

Under the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act), taxpayers who buy a new motor vehicle (cars, trucks, motorcycles, and motor homes) can deduct state or local sales or excise taxes paid on the purchase. The deduction is available for new vehicles only, which must be purchased after February 16, 2009 and before January 1, 2010. Additionally, the deduction applies only on the first $49,500 of the purchase price (used vehicles do not qualify for the deduction) cannot exceed $49,500). Vehicles costing more still get a deduction, but only based on sales tax applied to the first $49,500 of the purchase price.

Like many tax breaks, there are income limitations. The amount of the deduction is phased out for individuals whose modified adjusted gross income is between $125,000 and $135,000, and between $250,000 and $260,000 for married couples filing joint returns.

Expanded benefit

Not all states have a sales tax. In June, the IRS announced that taxpayers in states without a sales tax can deduct other fees or taxes imposed by the state or local government. 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, the IRS explained. These fees may not be called sales taxes or excise taxes but they generally act the same way, the IRS noted.

The IRS expanded the benefit because it believed Congress intended for everyone, and not just taxpayers in states with sales taxes, to benefit from the deduction. "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," IRS Commissioner Douglas Shulman said. "This means that more people can take advantage of this deduction when they file their tax returns next year."

Cash-for-clunkers

Another incentive rewards taxpayers who trade-in old "clunkers" for new, more fuel-efficient vehicles. Eligible taxpayers will apply vouchers of up to $4,500 to offset the purchase price of a new vehicle. Both the trade-in and new vehicles must satisfy certain fuel-efficiency standards.

The vouchers are tax-free. The purchaser will not recognize taxable income from a voucher. Although the vouchers are sometimes referred to a "credits," they are not tax credits. The National Highway Traffic Safety Administration, and not the IRS, is administering the "cash-for-clunkers" program.

The trade-in vehicle must be less than 25 years old on the trade-in date. Generally, trade-in vehicles must get 18 or less miles-per-gallon, although some large trucks and cargo vans have different requirements. There are also insurance and registration requirements.

The cash-for-clunkers program is temporary. Congress appropriated $1 billion for the program, which will begin July 1, 2009 and end November 1, 2009.

Please contact our office if you are planning to purchase a new car or truck. You may be eligible for one or both of these valuable incentives.

(IR-2009-60, www.cars.gov)