New Car Buyers in States with No Sales Tax Can Still Take Sales Tax Deduction

On June 10, 2009, the IRS announced that new car buyers in states with no sales tax are entitled to take the new car sales tax deduction under Sec. 164(b)(6) (IR-2009-60).

The American Recovery and Reinvestment Act of 2009, P.L. 111-5, introduced a deduction for taxpayers who buy new cars, light trucks, motor homes, or motorcycles between February 17 and the end of 2009. Buyers may deduct the portion of state and local sales and excise taxes attributable to the first $49,500 of a new vehicle’s purchase price for both regular tax and alternative minimum tax purposes. The deduction is phased out for single taxpayers with modified adjusted gross income in excess of $125,000 for the tax year ($250,000 for joint filers).

The IRS has determined that new car purchases made in states without a sales tax can qualify for the deduction. Purchasers in those states are entitled to a deduction for other fees or taxes imposed by the state or local government. (The states without a sales tax are Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon.) To qualify for the deduction, the fees or taxes must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per-unit fee. According to the IRS, Congress intended for these fees or taxes to qualify for this special tax deduction.

Even nonitemizers will be able to take this deduction; they will add it to the amount of their standard deduction. However, taxpayers who elect under Sec. 164(b)(5) to take the state and local sales tax deduction in lieu of deducting state and local income tax cannot also take the new car sales tax deduction.