If you paid sales tax when you bought a new car, you can deduct that expense on your income taxes -- but only under very specific filing circumstances. You must "itemize," and you must choose to deduct sales taxes rather than state and local income taxes. In 2009, Congress created a separate deduction that most people who had bought a new car could claim, but it was available for that year only.
To deduct the sales tax paid on a new car, you must itemize your tax deductions -- that is, add up all your tax-deductible expenses and claim the actual amount -- rather than take the generic standard deduction. When you itemize, you can deduct certain taxes paid to state and local governments, but you must make a choice: You can deduct state and local income taxes, or you can deduct state and local sales taxes. You cannot deduct both.
Once you elect to deduct sales taxes rather than income taxes, you have another choice to make. You can either add up the total amount you paid in sales taxes -- what the IRS refers to as "actual expenses" -- or you can use tables prepared by the IRS to find a generic sales-tax deduction based on your income and the number of people in your household. If you want to specifically deduct the sales tax on a new car, you must choose to deduct your actual expenses. However, you'll need documentation of the sales tax you've paid over the past year. That means you must have saved your receipts or have some other evidence of sales tax payments. Don't include any sales tax expenses that you can't document.
Generally, you can deduct the full amount of sales tax paid on a new vehicle. However, if the sales tax on car purchases is higher than the general sales tax rate, you can claim a deduction only for the tax you would have paid under that general rate. For example, say your state's general sales tax rate is 5.5 percent, but for car purchases, it's 5.75 percent. If you bought a $30,000 car at a 5.75 percent rate, you'd pay $1,725 in sales taxes. But you can only claim a deduction based on the 5.5 percent rate. So your deduction would be only $1,650.
For tax year 2009 only, Congress created a wider sales tax deduction for new car purchases in an attempt to give a boost to the auto industry. People who didn't itemize their deductions, and those who did itemize but chose to deduct income taxes rather than sales taxes, were allowed to also deduct sales taxes on a new vehicle. There were some limits, though. The car had to have been purchased between February 17 and December 31 of 2009. It had to be a brand-new vehicle, not a used car. Taxpayers could deduct only the sales taxes paid on the first $49,500 of the car's value. And the deduction phased out at higher incomes. Once a taxpayer's modified adjusted gross income was over $125,000 ($250,000 for married couples filing jointly), the deduction was reduced. At $135,000 ($260,000 for joint filers), it was eliminated entirely.
- Headlight on new car image by steven Husk from Fotolia.com