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Federal Tax Break For New Car, Motorcycle or Motorhome Purchases

As part of the stimulus act passed earlier this year, there is a new 2009 tax deduction for new cars, motorcycles or motorhomes purchased after February 16, 2009 and before January 1, 2010. The intent was to assist those respective industries during a time when sales have dropped off sharply. However, there was no provision in the bill that limited the deduction to the purchase of American-made cars, motorcycles or motorhomes. Please note the term "car" is meant to include motorcycles and motorhomes in the following paragraphs.

The deduction is limited to the state and local sales and excise taxes paid (i.e., federal excise taxes don't count). The car's original use must begin with the taxpayer. Also, the state and local taxes on up to $49,500 of the purchase price of the car are deductible. Therefore, if the car costs more than $49,500, only a pro rata portion of the state and local sales and excise taxes may be deducted. The law was not clear as to whether the deduction would be allowed for more than one car purchased, and more guidance is anticipated from the IRS. The deduction is phased out for single taxpayers whose modified adjusted gross income (MAGI) is between $125,000 and $135,000 and married taxpayers filing joint with MAGI between $250,000 and $260,000. This deduction may either be added as an increase in the taxpayer's itemized deductions or as an increase in the taxpayer's standard deduction. Therefore, the taxpayer is not required to itemize deductions to obtain the benefit. However, if the taxpayer elects to deduct state and local sales taxes rather than state and local income taxes, the deduction is included on Schedule A, line 5(b) on the 2008 form.

One important characteristic of this deduction is that it is also deductible for purposes of calculating the alternative minimum tax (AMT) (as long as you did not claim the state and local sales tax itemized deduction option). This means that if your state and local taxes have caused you to be subject to the AMT, this deduction is still a benefit for you. However, if you elected to deduct state and local sales taxes rather than state and local income taxes, the car deduction is considered part of the state and local sales tax deduction. Consequently, in this situation, none of the state and local sales tax is deductible in calculating your AMT. As a practical matter, in states with an income tax, the sales tax option was often not beneficial unless the taxpayer had large purchases subject to sales taxes.

Please note that this deduction is separate from another proposed incentive discussed in President Obama's budget regarding the replacement of older, more polluting cars with new, less polluting cars. President Obama's proposal has not been incorporated in any presently pending legislation, but the proposal alone could be causing taxpayers with older cars (i.e., eight to 10 years old) to wait and see if any additional incentive does become available.

For further information, please contact Mike Calahan at 312-980-2996 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.