TAX DEDUCTIONS FOR NEW VEHILCES

Dear friends of RC Jones & Associates

Under the new economic stimulus law, you can deduct state and local taxes paid to purchase a new vehicle. The deduction or adjustment to income applies to sales made after Feb. 16, 2009 and before Jan. 1, 2010. At first glance, the rules seem straightforward, but there are a few interesting twists and turns you should know about.

For starters, the new law allows you to write off sales and excise taxes attributable to the first $49,500 of the price of a new (not used) vehicle. This deduction is claimed "above the line" so it can also reduce taxes for other purposes.

Note that the new deduction isn't limited to passenger automobiles. It also covers motorcycles, light trucks and SUVs as long as you're the original buyer and the vehicle doesn't weigh more than 8,500 gross pounds. Motor homes also qualify.

However, like several other tax breaks, the write-off phases out for an AGI between $125,000 and $135,000 for single filers and an AGI of $250,000 and $260,000 for joint filers.

Be aware of a few caveats when comparing deductions: For purposes of the optional sales tax deduction, if the rate of tax on vehicles exceeds the general sales tax rate, the deduction is limited to the general rate and there's no purchase price limit or separate income limit. For instance, if a vehicle costs much more than $49,500, you're probably better off claiming the optional sales tax deduction. If you live in a state with a high income tax rate, you might opt to write off state income tax and tack on the new vehicle deduction.

Also, the new deduction is allowed for the alternative minimum tax (AMT), but the optional sales tax deduction is not. Thus, if you will be subject to the AMT before taking into account a deduction for state or local taxes, the decision is a no-brainer: There is no tax benefit if the optional sales tax deduction is elected instead of deducting state income tax, plus you forfeit any new vehicle deduction.

Can you claim the new deduction for more than vehicle? The law isn't clear on this point, but it stands to reason that deductions would be allowed on multiple purchases up to a $49,500 limit per taxpayer.

This new deduction may affect your decision to buy a vehicle. Contact us at (816) 792-9966 to assess your situation.

Very truly yours,
Robert C. Jones

RCJonesInc.Com