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New Car Sales & Excise Tax Deduction

If you bought a car between February 16, 2009 and January 1, 2010 (non-inclusive), and you paid a sales tax or excise tax, you may be able to deduct it from your income taxes [3]. This was one of the provisions of the 2009 American Recovery and Reinvestment Act. The car, light truck, or motorcycle has to weigh less than 8,500 pounds and you must have purchased it new. You cannot take the deduction if you purchased a used car or if you leased it and this deduction is not related to the Cash for Clunkers program [4]. You can deduct the sales or excise tax up to the first $49,500 of the purchase price. If you live in a state without a sales tax, like Delaware, you can deduct other fees and taxes as long as they’re collected by the government on sales. Fees collected by the dealer are not deductible.

The amount of your deduction is limited by your modified adjusted gross income. Single filers get a full deduction if their income is less than $125,000, a partial deduction up to $135,000, and no deduction if their income exceeds $135,000. For married filing jointly, a full deduction is available for incomes up to $250,000, a partial up to $260,000, and then no deduction if your MAGI exceeds $260,000.

Other salient details:

If we were to use Maryland as an example, you pay a 6% sales tax on the purchase of a new vehicle. If you are a single filer and earned less than $125,000, then you could deduct the 6% sales tax from your income taxes. If you purchased a $20,000 car, you now have a $1,200 tax deduction.

(Photo: wickenden [5])