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Should you take the new deduction for buying a car?

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Should you take the new deduction for buying a car?

Postby Shadows » Sat Mar 07, 2009 4:32 pm

Should you take the new deduction for buying a car? That's a good question

Last update: 6:12 p.m. EST March 5, 2009SAN FRANCISCO -- If nothing else, the American Recovery and Reinvestment Act, affectionately known as the stimulus bill, will stimulate plenty of visits to tax professionals' offices.
Case in point: The law offers a new break for buying a new car. But, as with most things tax, it's not quite as simple as it sounds.
Specifically, taxpayers who buy a brand-new car between Feb. 17 and Dec. 31 this year can deduct the sales tax. This tax break is available whether taxpayers itemize or take the standard deduction. Taxpayers can deduct the sales tax on up to $49,500 of a car's purchase price.
But the new tax law leaves a few questions unanswered, said William Massey, a senior tax analyst with Thomson Reuters' tax and accounting business.
Video: Major tax changes in Obama's budgetWhen it comes to paying taxes, WSJ's tax columnist Tom Herman tells Kelsey Hubbard who the big winners and losers are after President Barack Obama announced his $3.6 trillion budget.For instance, if a married couple filing jointly buys two cars -- one for each spouse -- for $20,000 each, can they deduct the sales tax on both cars? "There's really little guidance from the IRS and the statute doesn't specifically address these issues," he said.
Similarly, if a sole proprietor buys two cars and the total cost is less than $49,500, can she deduct the sales tax on both cars? That's still unclear. Of course, these may be unlikely scenarios; after all, if people were buying so many cars, the car companies would be in better shape.
Still, "hopefully the IRS will be issuing guidance soon," Massey said.
Which deduction to take?
Then, there's the new conundrum for people who live in states with no income tax.
Unrelated to the new car deduction, the law already allows people to choose to deduct state income tax or state and local sales tax. Generally, the only people who opt to deduct state sales tax are those who live in states with no income tax.
But now, if you buy a car you'll have to choose between the new deduction for car sales tax and the older one for state and local sales tax. One thing that's clear in the new law, Massey said, is that you can't take both the new car-sales-tax deduction and the state and local sales tax deduction.
Choose carefully, because the rules are different for each of these deductions.
For instance, while the state and local sales tax deduction doesn't have an income limit (other than the limit on deductions in general), the new car deduction starts to phase out for people with modified adjusted gross income of $125,000, or $250,000 for joint-return filers. Another difference: The state and local sales tax deduction is limited to the general sales tax rate in your area, even if the levy on auto sales is higher, Massey said. You'll need to figure out which deduction makes more sense for you.
The good news: The new law makes life easier for some taxpayers. Before, people who bought a car and who lived in a state that levies an income tax had to choose between the deduction for state income taxes and the one for state sales taxes. Now, they can take both deductions -- that is, one for their state income tax and one for the sales tax on their new car.
Something else to consider: If you fall into the alternative minimum tax, you can still take the new car deduction, but people in the AMT can't deduct state and local sales taxes.
Another question raised by the new deduction: While it's clear sole proprietors can claim it, it's unclear where they should claim it on the tax form, Massey said.
"The question is whether [the sole proprietor] gets an itemized deduction or a standard deduction or whether, as is typically the case with business deductions, he can deduct it above the line," he said.
"If that were the case, then the deduction would be allowed when arriving at adjusted gross income, and adjusted gross income can operate to reduce [the new deduction]. It gets tricky there," Massey said, noting that the IRS may have to "come up with a rule to deal with this potentially circular computation."
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