Stimulus New Car Sales Tax Deduction

Posted by James Hutchinson Mar 2, 2009

I think I am buying a new car this year. The U.S. government is going to give me about $500 to do it.

One of provisions of the American Recovery and Reinvestment Act (the 2009 Stimulus) is that for any auto or light truck purchase in 2009 (after 2/17/09), local and state sales taxes can be deducted from adjusted gross income, whether or not the taxpayer itemizes deductions.

So for example, with a 7% sales tax rate on a $25,000 car, the total sales tax paid is $1,750. In the 28% tax bracket, that is a tax savings of $490. The IRS website specifies that this will be phased out for AGIs over $125,000.

It is important to remember if you are trading in a car, in many states sales tax is reduced. Sales tax is charged on the net amount of the car, or the purchase price less trade-in. You won’t get the tax deduction, but you won’t be paying the sales tax either.

So head out for the nearest dealer and let Uncle Sam make that new car more affordable.