Qualifying for the New Sales Tax Deduction for Automobiles

July 10th, 2009 | Author: Linda Silva

A new deduction for qualifying motor vehicles taxes.

The recently enacted American Recovery and Reinvestment Tax Act of 2009 (P.L. 111-5) provides a new deduction for qualifying motor vehicles taxes.

1. Who can claim the deduction for motor vehicle taxes?

The Recovery Act makes the deduction available to purchasers of “qualified motor vehicles” after February 18, 2009, and before January 1, 2010 [IRC Sec. 164(a)(6) and Sec. 164(b)(6)(G)]. A qualified motor vehicle is a new passenger vehicle, light truck, or motorcycle that has a gross vehicle weight rating of 8,500 pounds or less, or a motor home of any gross vehicle weight [IRC Sec. 164(b)(6)(D)(i)].

A motor home means “a multi-purpose vehicle with motive power that is designed to provide temporary residential accommodations, as evidenced by the presence of at least four of the following facilities: Cooking; refrigeration or ice box; self-contained toilet; heating and/or air conditioning; a potable water supply system including a faucet and a sink; and a separate 110-125 volt electrical power supply and/or an LP gas supply.” A motorcycle is defined as a “motor vehicle with motive power having a seat or saddle for the use of the rider and designed to travel on not more than three wheels in contact with the ground” [49 C.F.R. § 571.3]

2. What motor vehicle taxes are deductible?

A deduction may be claimed for any state or local sales or excise tax imposed on the purchase of a qualified motor vehicle [IRC Sec. 164(b)(6)(A)].

3. How much can be deducted?

The Recovery Act provides that the full amount of the sales or excise is deductible for vehicles purchased for $49,500 or less. For vehicles costing more than $49,500, the deduction is limited to that portion of the tax allocable to the first $49,500 of the purchase price [IRC Sec. 164(b)(6)(B)].

Example 1. Fran Smith purchases a qualified motor vehicle for $66,000. Her state imposes a 6% sales tax on the purchase of the vehicle. That’s a tax of $3,960. Seventy-five percent (49,500/66,000) of the tax is allocable to the first $49,500 of her purchase price. So Fran’s deduction is limited to $2,970 (75% of $3,960).

4. Is the new deduction for motor vehicle taxes available for high-income taxpayers?

No. The deduction is phased out for taxpayers with modified adjusted gross income (MAGI) between $125,000 and $135,000 ($250,000 and $260,000 in the case of a joint return). The tax that is otherwise deductible is reduced by an amount equal to the ratio of (1) the excess of the MAGI over $125,000 ($250,000) to (2) $10,000 [IRC Sec. 164(b)(6)(C)],

Example 2. Same facts as in Example 1. Fran is single and has an MAGI of $129,000. Since her MAGI is $4,000 over the $125,000 threshold, she must reduce her deduction by 40% ($4,000/$10,000) of the amount that she would otherwise be entitled to deduct. That’s $1,188 (40% of $2,970), so her net deduction is $1,782. If her MAGI were $135,000 or more, she could claim no deduction.

MAGI is defined as adjusted gross income plus

Foreign earned income and housing excluded from income under IRC Sec. 911;
Income from sources with American Samoa excluded from income under IRC Sec. 931; and
Income from sources within Puerto Rico excluded from income under IRC Sec. 933 [IRC Sec. 164(b)(6)(C)].

5. Is the deduction available to taxpayers who don’t itemize their deductions?

Yes. While itemizers deduct their qualified motor vehicle taxes along with their other taxes on Schedule A, Form 1040, non-itemizers can also claim a deduction for qualified motor vehicle taxes.

The Recovery Act adds a new component to the standard deduction. For 2009, a taxpayer’s standard deduction includes (1) the basic standard deduction, (2) the additional standard deduction for being blind or age 65 or over, (3) the new up-to-$500 deduction for real estate taxes, (4) the new disaster loss deduction (the excess of personal casualty losses from a federally declared disaster over personal casualty gains) and (5) qualified motor vehicle taxes [IRC Sec. 63(c)]. Because the definition of qualified motor vehicle taxes for standard deduction purposes is the same as the deduction for Schedule A purposes, the standard deduction component is subject to the same limitations (e.g., MAGI phase-out and $49,500 purchase price ceiling).

The expansion of the standard deduction means that some taxpayers who itemized their deduction in the past may be better off claiming the standard deduction in 2009.

Example 3. In 2009, Jim Benson, an unmarried taxpayer, pays $700 in real estate taxes. He also purchases a qualified motor vehicle on which he pays $1,200 in deductible sales taxes. His total itemized deductions (including the real estate taxes and the sales tax on qualified motor vehicles) come to $7,000. Under the pre-expansion standard deduction, Jim would have itemized his deductions because his itemized deductions exceed the $5,700 basic standard deduction for 2009. However, under the expanded standard deduction, Jim can deduct (1) $5,700 regular standard deduction, (2) $500 in real estate taxes, and (3) $1,200 in qualified motor vehicle taxes—a total of $7,400. So, for 2009 at least, Jim is better off going the standard deduction route.

6. Is the deduction for motor vehicle taxes available for the purchase of a used vehicle?

No. The deduction cannot be claimed for the purchase of a used vehicle. To claim the deduction, the original use of the purchased vehicle must begin with the taxpayer [IRC Sec. 164(b)(6)(D)(i)].

7. Is the deduction available only for vehicles made by U.S. manufacturers?

No. A taxpayer can claim the deduction for vehicles manufactured by foreign as well as domestic companies. However, to be deductible the motor vehicle tax must be a “state or local” tax. This means a tax imposed by “a State, a possession of the United States, or a political subdivision of any of the foregoing, or by the District of Columbia” [IRC Sec. 164(b)(2)] So sales or similar taxes imposed by foreign jurisdictions do not qualify.

8. Does a qualified motor vehicle have to meet special fuel economy standards?

No. The Internal Revenue Code contains a number of recently enacted incentives, such as the hybrid motor vehicle credit, designed to encourage the purchase of fuel efficient vehicles. However, the new qualified motor vehicle tax deduction is aimed at helping the ailing automobile industry, and, thus, even “gas guzzlers” qualify.

9. If an itemizing taxpayer already claims a deduction for state and local sales taxes, how does the new deduction for motor vehicle taxes provide any benefit?

Maybe not. As a rule of thumb, a taxpayer who currently deducts state and local sales taxes on Schedule A will not benefit from the Recovery Act’s new deduction.

Under IRC Sec. 164(b)(5), through 2009, a taxpayer can elect to deduct state and local sales taxes on Schedule A in lieu of claiming a Schedule A deduction for state and local income taxes. (Taxpayers who make this election are generally from states that don’t have an income tax.) Electing taxpayers include in their deduction for state and local sales taxes any tax paid for the purchase of a motor vehicle. So, prior to the Recovery Act, these taxpayers could already claim a deduction for sales taxes on their motor vehicle purchases.

No Double Dipping. To avoid “double dipping,” the Recovery Act bars a taxpayer from claiming the new deduction for qualified motor vehicle taxes if he or she elects the sales tax deduction [IRC Sec. 164(b)(6)(F)]. Thus, to claim the new deduction, a taxpayer would have to give up a deduction for all sales taxes, including those on purchases other than motor vehicles. In addition, the sales tax deduction for electing taxpayers includes no limits on MAGI or purchase price as the new motor vehicle tax deduction does.

Possible Exception. A taxpayer who previously made the sales tax election but may be better off forgoing itemized deductions entirely and claiming the standard deduction, plus the qualified motor vehicle tax deduction (see Example 3).

10. Is the deduction for qualified motor vehicle taxes available on the purchase of vehicles used for business purposes.

Yes. Normally, sales taxes paid for the purchase of property used in a business must be included in the cost of the property and written off through depreciation [IRC Sec. 164(s)], However, the Recovery Act provides that this restriction does not apply in the case of qualified motor vehicle taxes [IRC Sec, 164(b)(6)(E)].

11. Can qualified motor vehicle taxes be deducted for purposes of the alternative minimum tax (AMT)?

Yes. While the deduction for sales taxes elected in lieu of income taxes is included in the list of taxes not deductible in computing alternative minimum taxable income, the Recovery Act did not add qualified motor vehicle taxes to that list of disallowed taxes. And the Recovery Act specifically allows a deduction for the new motor vehicle component of the standard deduction in calculating AMT [IRC Sec/ 56(b)(1)(E)].

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