At the Showroom, Don’t Forget the Deduction

As 2010 car models start creeping into showrooms and auto dealers lay on incentives in the hopes of beating the continued decline in car sales, buying a new car may start looking like an attractive option again.  And even with the end of the Cash for Clunkers program, the US government is still willing to give you a nudge in the “buy” direction.

For any new passenger vehicle purchase made between February 17 and December 31, 2009, inclusive, you may be eligible to deduct state, local, and excise taxes from your 2009 federal income tax.  The only two restrictions are: (1) the deductible taxes are limited to those levied on the first $49,500 of the purchase price (that is, you don’t get a higher tax deduction simply for buying a Lamborghini), and (2) you can only take the deduction if your modified adjusted gross income (MAGI) is less than $135,000 if you are filing individually or $260,000 if you are married and filing jointly.  The deduction is also phased out for individual filers with MAGIs between $125,000 and $135,000 and joint filers with MAGIs between $250,000 and $260,000.

Other than the limitations above, the deduction initiative is quite generous.  It covers not only cars, but also light trucks (maximum gross weight of 8,500 pounds), motorcycles, and even motor homes.  You can take the deduction for as many new cars as you buy during the period, as long as you are eligible within the two restrictions detailed above.   Furthermore, even if your state does not have sales taxes, you can still deduct fees or other local government taxes associated with the vehicle, as long as they are based on the purchase price or assessed as a per unit fee.

While this deduction may not stir car purchases in the way the now-extinct Cash for Clunkers did, it may still prove to be a nice incentive when coupled with all the markdowns on 2009 models and the extra features added to the 2010 models to boost holiday season sales.