[Updated October 2009] In addition to the working tax rebates and home owner tax credits, the 2009 economic stimulus package contains an Auto Assistance Ownership amendment that provides tax breaks for new vehicle buyers by giving them a federal-income-tax deduction on local sales and excise taxes, but not on the interest on loans, as was originally proposed. It enables taxpayers to buy now and get cash back later on their 2009 tax returns. It is applicable to any new vehicle purchased after Feb 17th 2009 (the date the stimulus bill was signed into law). Here are all the eligibility criteria, based on recent IRS press releases:

The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new foreign or domestic cars, SUV's, light trucks, motor homes or motorcycles that weigh no more than 8,500 pounds. You can still buy a qualifying vehicle for more than $49,500 (e.g a $80,000 BMW per a commenter's question below), but you will only get a tax deduction up to the specified limit.

The deduction is only available to families making less than $260,000 (or $135,000 for single filers). It is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

The new vehicle must be purchased on or after Feb. 17, 2009, and before Jan. 1, 2010, to qualify for the deduction. Purchases before Feb. 17, 2009, are not eligible for this special deduction.

How to claim the tax deduction : The deduction is available regardless of whether a taxpayer itemizes deductions on their return (Schedule A). The deduction cannot be taken on 2008 tax returns (even if they are amended or filed late), so must be claimed when they file their 2009 returns in 2010. Also, unlike other tax credits in the economic stimulus package this tax break is not an offset to your federal taxes (i.e. a tax credit), it is a deduction against your taxable income.

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To illustrate the above tax deduction, consider the following example from a commenter. The average new car purchase price the first 11 months of last year was $28,280, and the average used car trade-in value was $15,203, according to data from the National Automobile Dealers Association.

States typically tax the difference — $13,077 in this case. So a 5% sales tax rate would be $654, meaning the deduction would reduce taxable income that much. Each state has a different car sales tax, so the deduction will vary by state.

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States without new car sales tax: The IRS and treasury have recently determined that purchases made in states without a sales tax – such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon – can also qualify for the new car tax deduction. The IRS stated taxpayers who purchase a new motor vehicle in states that do not have state sales taxes are entitled to 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.

“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,” said IRS Commissioner Doug Shulman. “This means that more people can take advantage of this deduction when they file their tax returns next year.” To qualify for this deduction, the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010. Taxpayers can claim this special deduction only on their 2009 tax returns to be filed next year.

There is no restriction on the type or car and it does not have to be a Hybrid. Unlike the worker and housing tax credits, the car buyer tax break is an income tax deduction. This means that it would reduce your taxable income and hence net tax liability. So the higher your tax rate, the more you will benefit.

** As more details on the car buyer tax deduction are made available, I will provide updated information encourage you to subscribe (free) via Email or RSS to get the latest news. **

The New Car Deduction and Cash for Clunkers Program

Many folks have been wondering whether this tax deduction can be claimed in conjunction with the now expired cash for clunkers rebate voucher ($3500 or $4500) program. The answer is yes. In fact, as I discuss in this article, there are up to 3 government sponsored subsidies/tax breaks available for new car buyers. The key is meeting the eligibility criteria for each one, which with some careful planning is definitely possible.

For example, in most states car buyers are taxed on the amount (sales price) of the car before the cash-for-clunkers rebate ($3,500 or $4,500) is applied. So if you are buying a $45,000 car that qualifies for cash-for-clunkers, you will pay sales tax on the $45,000 price. It is on this sales price you can claim the new car tax deduction. Assuming your state and local sales tax rate is 6%, you'd pay $2,700 in sales tax (on the $45,000 car) which would be deductible on your federal return.

Your actual tax savings would depend on your income and marginal tax rate, of course. If your marginal tax bracket is 15%, you'd multiply your deduction by 15% and get $405 in actual tax savings in our example. If you're a higher income taxpayer in the 33% marginal bracket, the savings would be $891. The deduction is available regardless of whether a taxpayer itemizes deductions on their return (Schedule A). The deduction cannot be taken on 2008 tax returns - even if they are amended or filed late. Also, taxpayers who might want to deduct all of their state and local sales taxes for 2009, in lieu of income taxes, won't be able to take two deductions for the state and local sales taxes paid on a car.

[Previous Update] Get more savings on your new car : See this post on
the recently approved Cash for Clunkers program where buyers can get $3500 to $4500 off on new car purchases. Or, this article for a summary of all the government sponsored auto-tax credits.

[Original Amendment Information - Feb 2009] Senator Barbara Mikulski is author of the amendment and here are the relevant details from the official press release (based on the original Senate proposal):

"The American automobile industry is currently one of the biggest drivers of the U.S. economy. Six million jobs are at stake in the American car industry and one out of every 10 jobs in America is auto-related. A collapse of a major U.S. automaker, such as GM, Ford or Chrysler, would further erode the American economy, given the huge network of suppliers, dealers, and other businesses and communities that would be affected. [This] amendment is not about bailouts. It's about jobs, jobs, jobs.

The amendment is simple. If you buy a new passenger car, mini-van, or light truck by December 31st of 2009, you will get a tax deduction for your sales or excise tax and the interest on your loan. A family would save about $1,500 on a $25,000 car, not counting the additional incentives from dealers.

This amendment also helps state governments. States rely on tax revenue from new car sales. In my home state and many other states the sales tax is around 6 percent, so on a $25,000 car the state gets $1,500 in revenue. New car sales are down millions per year from their averages. This means states are losing billions when they already are struggling. As people buy new cars states' tax revenues will increase.

This amendment is a big deal to families because a car is the second biggest purchase most families make. My amendment is targeted. Families with an income of more than $250,000 a year are ineligible. Cars costing more than $49,500 also are ineligible. This amendment also helps the environment because it gets more people into new cars and new cars are cleaner and more fuel efficient than old cars.

There are 20,000 new car dealerships nationwide. They employ a million people. Most people don't realize that dealers employ an average of 53 people in sales, mechanics, and administrative positions. I visited car dealerships in Maryland and heard from these employees.

Well, I say let's put money where it matters - where it creates jobs. That's why we need this amendment for creating jobs, for consumers, and for the auto industry that is such a driver of our country's economy - so we can get America rolling again."

Given the sorry state of the auto industry, highlighted by the recent bailouts of the US automakers this amendment is not a surprising addition to the overall stimulus package. I am also sure you will see a number of "stimulus" related car deals where dealers will hide costs to keep the purchase price tag below $50,000. So when buying a car be careful of those add on or hidden costs and review these 10 very useful tips on buying a new car .

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