Friday, May 22, 2009

Q&A - New Car and Tax Deductions


Question


I am purchasing two new cars this year and want to take advantage of the new tax deductions for sales taxes paid. What are the rules for claiming these deductions?

Ben P., Omaha, NE

Answer


In order to claim any sales tax deductions, the car must be purchased after February 16, 2009, and before January 1, 2010, in order to qualify. In addition, only the sales tax on the first $49,500 of the cost of the vehicle is actually tax deductible.

The IRS has very recently issued guidance that indicates that the cap will apply to each car purchased and not to all cars purchased in one year. This is a nice break for taxpayers, as if you buy two cars and each costs less than $49,500, all of the sales taxes paid will be deductible. There are some special rules for this tax break:

- If you itemize your deductions on Schedule A, you can claim these taxes paid in the “taxes” section.

- If you do not itemize your deductions, you can still claim this deduction by adding the sales taxes paid to your overall standard tax deduction.

Finally, like many other favorable tax breaks, this one also has income phase outs. These start for married couples who earn over $250,000 and single filers who earn over $125,000.

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