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Part of government stimulus plan includes new-car sales tax deduction till Dec. 31

November 15, 2010

State and local sales and excise taxes can be deducted on all new cars purchased this year from Feb. 17 to Dec. 31, under the $787 billion American Recovery and Reinvestment Act that President Obama signed Feb. 17.


The Auto Assistance Ownership amendment in the final economic stimulus package provides tax breaks for new-car 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 by a Maryland senator.


Also, the deduction can be claimed on the purchase of a new vehicle but not on a vehicle lease.


There is no restriction on the type or car purchased, and it does not have to be a hybrid. Unlike worker and housing tax credits in other parts of the stimulus package, the new-car tax break is an income tax deduction. The buyer would be reducing his taxable income and, hence, net tax liability, so buyers in higher tax rates would benefit most.


But the stimulus package does contain price, weight and income restrictions. Deductions are allowed only for:


• the first $49,500 of a vehicle’s purchase price;

• vehicles that weigh less than 8,500 pounds; and

• taxpayers whose modified gross income is under $125,000 for individuals or $250,000 for jointly filed returns.


The tax deduction can be claimed on a new vehicle of any model year—when the original use commences with the taxpayer.