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Is Sales Tax On A New Car Deductible?

By , March 15th, 2016 | One Comment


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The time of year has arrived: the start of warmer weather, the appearance of flora and Easter decor, daylight savings, and filing your income taxes.

Green is finally in the air again, and in more ways than one. If you have not yet filed your 2015 taxes and you purchased a new car before January 1, 2016, your acquisition may qualify for a deduction.

Sales tax can be a (not so) funny thing, especially when buying a big ticket item like a new vehicle. In states that do enforce a sales tax, you are obligated to pay this fee when making your purchases where the tax applies. For cars specifically, whether leasing or buying to own directly, you can do so separately or roll it into the total loan balance.

While you may have already been aware of this sales tax situation, you may not realize how the tax deduction for your new set of wheels works.

First, it is important to understand¬†that this is a part of the¬†American Recovery and Reinvestment Act of 2009, which is particularly important if you live in a state that does not inflict a state income tax. The Internal Revenue Service (IRS) quote, “permits taxpayers to take¬†a deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles.” This does does not include rentals or leased vehicles.

However, there are a few things you need to know as well as some limits. These consist of:

  • You cannot deduct sales tax and state income tax. The IRS will only allow you to pick one to discount.
  • You can only take a one-time deduction for your purchase even if you finance the cost. The lifespan of the loan does not equal the amount of times you can claim a write-off. Additionally, any interest that comes with the credit also does not count toward the subtracted total.
  • The deduction is limited for local and state sales taxes paid up to $49,500.
  • When filing, you must itemize your deductions. Thus, you will need your receipts to back up your claims. You will¬†cite these on¬† Schedule A of your Form 1040.¬†You can either claim the exact amount of taxes you paid or you can receive the standard sales tax deduction determined by the IRS through a table based on your state, family size and income.
  • If your state imposes a higher tax rate on¬†motor vehicles, you can only deduct at the general rate that applies to other purchases.
  • If you live in a state with higher income tax rates, such as California and New York, you will be better off choosing the income tax deduction instead of the sales tax.
  • If you reside in one of the income tax-free states, like Alaska, Florida and Nevada, or in a low-income tax rate state, this is the best option for you.
  • In order to qualify for this adjustment, you must be the first owner of the vehicle; used car purchases will not be considered. However, the year of the car does not matter.
  • Taxpayers with higher incomes unfortunately do not apply. The IRS website also states that the deduction is reduced¬†for¬†“taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.”

If you’re interested to getting an idea of your state’s tax rates, the IRS has a handy calculator that shows what residents can deduct.

In summary, as you prepare to file, be sure to speak with your accountant about the paperwork you’ll need. They will hopefully (and should be able to) provide you with the guidance to make the best decision for your tax return.

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