Thursday, June 25, 2009

Shedding Light on New Federal Auto Deductions and Credits

In light of ailing auto sales and an added emphasis on energy efficiency, the federal government has unveiled tax breaks and rebates for people who purchase a new car in 2009 (including an additional break if you think green while doing so). While these credits and deductions do not apply to all taxpayers and consumers, many Americans will likely benefit from the incentives.

Motor Vehicle Sales Tax Deduction

The American Recovery and Reinvestment Act of 2009 includes a state and local sales and excise tax deduction paid on the purchase of new vehicles during 2009. Taxpayers residing in states without a sales or excise tax (Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon) will be able to deduct other fees or taxes imposed by the state or local government, granted that they are assessed on the purchase of the vehicle and are based on the vehicle’s sales price or as a per unit fee.

Who qualifies?
In order to be eligible for the Sales Tax Deduction, you must fit all of the following criteria:
  • Purchase the right type of vehicle: The vehicles that qualify must be new, and include cars, motorcycles, light trucks and motor homes
  • Do not exceed the income requirements: If your modified adjusted gross income is less than $125,000 if you file taxes as an individual, or $250,000 if you file jointly, you may qualify for the full tax benefit of this deduction. If your modified adjusted gross income is between $125,000 and $135,000 if you file taxes as an individual, or $250,000 and $260,000 if you file jointly, you may still be able to receive partial benefit of this deduction. If your modified adjusted gross income exceeds $135,000 if you file taxes as an individual, or $260,000 if you file jointly, you will not qualify for the deduction
  • Purchase during the right time frame: Only vehicles purchased between February 17, 2009 and December 31, 2009 qualify for the deduction
How beneficial is this deduction?
The sales tax deduction can be very beneficial to taxpayers who qualify. The one caveat, however, is that you may only deduct the sales or excise tax imposed on the first $49,500 of a car. Also, it is very important to note that this deduction is available even if you do not itemize deductions, allowing you to get the full tax benefit even if you just take your standard deduction.

Here’s an example: Let’s say you live in Los Angeles, California, and would like to purchase a brand new Acura TL. For this example, we will say it costs $42,235 (I opted for the all wheel drive and navigation). The sales and use tax rate in Los Angeles is 9.25%, so the sales tax on your Acura will cost $3,906.74. If you qualify for this tax deduction, you will be able to reduce your adjusted gross income for the 2009 tax year by $3,906.74 on top of your standard or itemized deduction.

Car Allowance Rebate System (also known as Cash for Clunkers)

The Car Allowance Rebate System (CARS) was recently enacted to provide new car buyers with incentive for “thinking green” when they explore their new car options. New car buyers who choose to trade in their current vehicle to use toward the purchase of a more environmentally friendly alternative may qualify.

Unlike the motor vehicle sales tax deduction, CARS is a tax-free credit provided by the dealer to reduce the purchase price of their new vehicle, as opposed to a deduction that would lower the taxpayer’s adjusted gross income. The credit will vary between $3,500 and $4,500, depending on the trade-in and purchased vehicles.

What Vehicles Qualify?
In order for a vehicle to qualify, the following criteria must be met:
  • The vehicle must be purchased between July 1, 2009 and November 1, 2009
  • The trade-in vehicle must be less than 25 years old at the time of trade-in
  • The vehicle purchased/leased must be new. If the vehicle is leased, the period must be for at least five years
  • Generally, the trade-in vehicle must get combined city/highway fuel economy of 18 or less MPG (very large pickup trucks and cargo vans have a different requirement). Visit to view your vehicles estimated fuel economy
  • The trade-in vehicle must be registered and insured by the buyer throughout the full year preceding the trade-in date
  • The suggested retail price of the new vehicle cannot exceed $45,000
  • The vehicle must be sold by a dealership registered with CARS program. Visit for a complete list of participating dealerships as soon as the program is under way
So what’s the catch?
Before you trade in your cherished ’99 Mercedes SL500 for a brand new Toyota Prius, be aware that you are not going to receive the Kelley Blue Book value for your car. Rather, you will receive the scrap value of your car, since the law requires that your trade-in vehicle is destroyed. So if your SL’s trade in value is listed around $14,000, it may be in your best interest to forgo this credit. On the other hand, you may want to consider trading in your ’91 Isuzu Trooper in fair condition with 150,000 miles, since its trade in value will likely settle under $500.

Another thing that is yet to be seen will be how participating dealerships work CARS into their current rebate and discount offerings. While the dealerships are reimbursed by the Fed, it will be interesting to see how participating dealerships advertise the program. There is always the possibility that some dealers will cut back on price bargaining, citing the credit as ample incentive to buy with them. However, it is possible that to become a program participant, dealers may have to adhere to certain criteria governing advertising and sales tactics. This is still unknown, as registration details have yet to be released.

Last, it is important to note that CARS will only benefit the owner of the trade-in vehicle if they have owned, registered and insured the vehicle for more than a year. So you cannot go out and acquire the aforementioned Isuzu next week in an effort to save $4,000 on your Prius purchase. You also cannot transfer the title for your mother’s ’85 Cadillac Eldorado into your name to secure the benefit.

If you would like more information about the new vehicle tax and rebate benefits discussed above, you can visit these websites:
Motor Vehicle Sales Tax Deduction IRS description
Cash for Clunkers consumer website
Car Allowance Rebate System government website

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