Auto Purchase Incentive (from ARRA 2009)

The expanded automobile sales and excise tax deductibility component of the American Recovery and Reinvestment Act of 2009 (ARRA 2009) has caused a bit of confusion.

Here’s how it works:  If you purchase a vehicle between February 17, 2009 and January 1, 2010, your state and local sales tax may be deductible on your 2009 tax return.  If you itemize your deductions on your tax return, this deduction can be taken on top of your calculated sales tax deduction (on Line 5, if your sales tax is greater than your income tax).  However, if you do not itemize your deductions, this provision in ARRA 2009 allows you to take a deduction for the sales and excise taxes from your qualified auto purchase above and beyond the standard deduction.

Specifically, a qualified motor vehicle means a passenger automobile, light truck, or motorcycle that has a gross vehicle weight rating of not more than 8,500 pounds, or a motor home, acquired on or after February 17, 2009, and before January 1, 2010, the original use of which commences with the taxpayer.

Individuals who itemize deductions will be able to deduct qualified motor vehicle taxes on their 2009 Form 1040, Schedule A. Qualifying individuals who do not itemize will be allowed to claim qualified motor vehicle taxes paid as part of the standard deduction.

This is, of course, subject to income limits ($125k for singles, $250k for joint filers, each with a phaseout up to $135k and $260k, respectively) and is also subject to a $49,500 cap on the purchase price (tax attributible to that amount or less is deductible).  The deduction is also allowed for purposes of calculating alternative minimum tax (AMT).

I hope that helps clear things up!

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author