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.

States and Taxes - Changing your state tax base

There are major tax differences from state to state, varying from no state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) to those with limited taxes (New Hampshire and Tennessee tax only interest and dividends) to low (Illinois and Pennsylvania tax at 3% or so) to very high (California, Vermont and Rhode Island are all over 9%).

As such, many taxpayers wish to move out of high tax states and into states with little or no state income taxes (the differences can result in a savings of thousands of dollars per year). Please be aware, however, that the IRS tax return will look the same in the new state, as federal tax law applies to all 50 states.

Here are a few tips if you are looking to change your state tax base:

- Sell current personal residence and move.

- File state tax returns for new state showing residency there. Also, use new state’s address on returns filed with IRS.

- Change drivers licenses and voters registration cards to new state. In addition, register all vehicles in the new state to establish a nexus to this state.

- Change bank accounts to a branch in new state.

- Execute a new will or living trust using new state as current state of residence.

Q&A - Business Expenses and Tax Deductions

Question


My accountant recently told me that I could not deduct my expenses to a business convention in Las Vegas because I spent one of the days there doing personal sightseeing and only conducted business for two days while I was there. I think I can deduct the expenses. Please help, as this will cost me a lot of money.

Tom T., Seattle, WA

Answer


Tom– you are in luck, as all of your travel expenses are deductible, with the exception of any amounts you spent while sightseeing (these are personal expenses and are not deductible).

All of your travel expenses (airfare, hotel, meals/entertainment, seminar/convention fees, and local transportation would be deductible, but not the gasoline or meals for your sightseeing activities).

The basic rule is that your trip must be primarily for business (attending the convention was the main purpose and not sightseeing), and you must spend more time for business than pleasure on your trip. For purposes of determining how much time is business related, your travel each way counts as business days.

In addition, you should spend at least four hours each day while you are at the convention doing business in order to make these days count as business days. If you satisfy these rules, there is no reason why you cannot claim your travel expenses.