Planning on buying a new car? Now might be the best time. The American Reinvestment and Recovery Act, commonly known as the Federal Stimulus Bill, provides some enticing incentives for purchasers of new cars and several other types of motor vehicles. The incentive is in the form of a tax deduction on your 2009 tax return. The initial form of the legislation provided for a tax credit, but the final legislation that was passed made it into a tax deduction. Depending on your income level and the vehicle you are planning to buy, this benefit could yield a fair chunk of change in your pocket.
Here are the important points to note concerning this deduction:
- Most cars, motorcycles, light trucks, motor homes, SUV’s and RV’s are eligible for this tax deduction, though there are some restrictions. The Gross Vehicle Weight (GVW) of the vehicle has to be less than 8500 pounds. Thus, for example, the Hummer H1 and H2 are ineligible, since their GVW’s exceed 8500 lbs, but the H3 satisfies the requirement. You can look up the GVW of your vehicle before claiming the deduction.
- State and local sales taxes paid on up to $49,500 of the purchase price of qualifying vehicles are deductible. Leased vehicles are ineligible. In states that do not have sales taxes, there is a provision for deduction of other taxes or fees paid.
- The vehicle tax credit has a deadline. The vehicles must be purchased on or after February 17, 2009, and on or before December 31, 2009.
- Your eligibility for the vehicle tax credit depends on your income. Taxpayers with modified AGI of less than $125,000 (if filing singly) or $250,000 (if filing jointly) are eligible to get the full benefit. If your AGI exceeds these amounts, then the amount of deductions is phased out till $135,000 for single filers and till $260,000 for joint filers. Therefore families whose AGI exceeds these amounts should make a careful decision as to who will potentially be using the vehicle and who should be buying it, so that it may be possible to get the full benefit. Taxpayers with AGI above $135,000 (if filing singly) or $260,000 (if filing jointly) do not qualify.
- Businesses are ineligible to claim this deduction. They can, however, capitalize the sales tax as part of the acquisition of the vehicle, and can claim Section 179 (depreciation expense).
- Itemizing doesn’t matter. This deduction can be availed of, whether or not you itemize other deductions on your Schedule A.
The Obama administration is trying to jump start the sagging automobile sector by offering these various incentives. Earlier this year owners of used fuel-inefficient vehicles were given an incentive to trade in their vehicles for more fuel efficient ones, in the “Cash for Clunkers” program. This incentive was in the form of a voucher and did not have any AGI restrictions, and the voucher amount is non-taxable. Anyone contemplating buying a new car should look into the current offering and make a wise decision. The offer, one more time, is only for cars and other qualifying vehicles purchased on or before December 31, 2009. The IRS has more information.
There has never been a better time to purchase that new car you have been fantasizing about, and save some federal tax dollars in the process.
