If you’ve been thinking about buying a car for either business or personal use, do it soon. The tax breaks on new vehicles have been enhanced by the American Recovery and Reinvestment Act, better known as the stimulus bill. Some of the provisions expire at the end of the year, while others will phase out a few months into 2010.
Though the Car Allowance Rebate System credit, better known as Cash for Clunkers, is gone, plenty of tax advantages remain for those who buy new vehicles.
Sales Tax Deduction
Under the ARRA, if you buy a new car or truck between Feb. 17, 2009, and the end of the year, the Internal Revenue Service lets you deduct the vehicle’s sales or excise tax. An unusual facet to this deduction is that you can take it even if you file the short form 1040-EZ and don’t itemize your taxes.
If you live in a state that doesn’t have sales tax, you can deduct excise taxes and other fees associated with the purchase of your vehicle. Cars, trucks, motorcycles, and motorhomes all qualify.
The deduction you can take will depend on your vehicle purchase price, your income, and the sales-tax rate in the state where you buy your vehicle. You can only write off sales tax up to $49,500. The deduction begins phasing out above $125,000 in adjusted gross income for a single person or $250,000 for a married couple.
Business Depreciation Deduction
If you purchase a vehicle for your business, you can use the business depreciation deduction to write off a substantial portion of the purchase price in the year of the purchase. The ARRA boosted the amount of the first-year vehicle depreciation allowance from $2,960 in 2008 to $10,960 this year. For vans and light trucks, the allowance went from $3,160 last year to $11,160. This depreciation deduction is good for either new or used vehicles.
Because tax laws are often passed as the tax year progresses, it’s uncertain whether this higher first-year depreciation write-off will survive for 2010. If you want to ensure you’ll capture this deduction, buy your vehicle before the end of the year.
You can get an additional tax credit for buying specific models of hybrid gas-electric vehicles. This is a highly desirable tax break because it’s a credit, which subtracts directly from your tax owed dollar-for-dollar, where a deduction merely reduces your taxable income.
The IRS issues a list of hybrid vehicles that qualify for the deduction. For 2009 models, 22 have been approved for credits ranging from $1,550 for a Saturn Aura or Chevrolet Malibu Hybrid to $3,000 for a Ford Escape or Mazda Tribute Hybrid.
For 2010 models, the credit gets more complicated, with most vehicles carrying a $2,200 credit all year but a half-dozen models seeing their credit shrink as time goes on. It may be hard to get the full write-off on these because these models may not be available to purchase before 2009 ends.
The ARRA gave a big boost to all-electric vehicles that charge by plugging into an electrical outlet. The stimulus bill provides a minimum $2,500 tax credit for these “plug-in” vehicles. If you buy a powerful plug-in that runs longer on a single charge, you get a bigger break: up to $7,500 for plug-ins that can run 16 kilowatt hours before they need to recharge. This credit is currently set to run through 2011.
State Tax Breaks
With the economy down, some states have enacted their own laws regarding new-vehicle purchases. Investigate what advantages you might gain through state vehicle-purchase breaks as well. Washington state, for instance, waived sales tax on purchases of hybrid gas-electric vehicles in 2009.
Business reporter Carol Tice contributes to several national and regional business publications.