Tax Breaks for Vehicles

You bought a car last year and that monthly payment is causing pangs of buyer's remorse. Take heart that new car could lead you to a refund this tax season.

That's because taxpayers who bought new vehicles in 2009 are eligible for deductions or credits that could help cut their tax bills or boost their return.

SALES TAX DEDUCTION
Tucked within last year's economic recovery act is a provision that allows buyers of new vehicles to deduct state and local sales and excise taxes. Those who bought a vehicle between Feb. 17 and Dec. 31, 2009 are eligible.

Most types of vehicles qualify cars, trucks, motorcycles and motor homes all count. But if you’re new ride last year was a pricey luxury car, your deduction could be capped. Filers can only claim a deduction for taxes paid on up to $49,500 of the sales price.

So on a $25,000 car bought in a state where the applicable taxes come to eight percent, which entitles you $2,000 deduction.

But your deduction will be smaller if you earn between $125,000 and $135,000 a year, or between $250,000 and $260,000 for married couples filing together. The deduction is eliminated for individuals earning more than $135,000 and for joint filers earning more than $260,000.

The tax break is also available for people living in states with no sales tax, which includes Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon. Filers in these states can simply deduct other fees or taxes imposed by state or local governments, such as a city-wide sales tax.
The deduction is available regardless of whether you itemize your returns. Taxpayers who do not itemize can simply add the tax break to their standard deduction on their 2009 return.

The decision to itemize or not will depend on your income. Most tax preparation software and any tax adviser should be able to help you make the decision.

HYBRID TAX CREDIT
Recent buyers of some gas-electric hybrids, like the Nissan Altima hybrid, may be eligible for a tax credit. Tax credits can be more valuable than deductions because their value counts as taxes already paid; deductions simply lower your taxable income.

The rules of the hybrid tax credit are a bit more complicated. When the tax credit took effect in 2006, the number of tax credit-eligible hybrids each automaker could sell was capped at 60,000. That means the credit has long expired for hybrids from carmakers like Toyota and Honda, which have been selling popular hybrids for a while.

Eligible 2009 model-year vehicles include certain hybrids made by General Motors, Nissan, Chrysler, Ford, and Mazda. Tax credits for these hybrids range between $1,550 and $3,000.

For 2010 model-year vehicles, which went on sale last fall, tax credits are available for certain hybrids made by GM, Ford, BMW, Mercedes-Benz and Nissan. The amounts range between $650 and $3,400. A detailed list of available hybrid tax credits can be found on the IRS Web site.

LOOKING AHEAD: PLUG-IN TAX CREDIT
There is one tax break that will become more available to car buyers this year: a credit meant to spur purchases of plug-in vehicles. The credit is worth between $2,500 and $7,500.

Vehicles qualifying now include the Tesla Roadster, a high-end electric sports car built by Tesla Motors Inc. that costs around $109,000. But automakers will begin rolling out more moderately priced electric cars later this year.

Nissan has said it will start selling an all-electric car called the Leaf. Although it hasn't announced a price, it will be a good deal less than vehicles like the Roadster. GM, meanwhile, will begin selling the Chevrolet Volt, which is expected to cost around $40,000 after the tax credit.

The cap on this tax credit will be much higher than the hybrid tax credit. Automakers can sell up to 200,000 plug-ins before it expires.