The Stimulus Plan and New Car Sales

Last month, President Obama signed the "American Recovery and Reinvestment Act of 2009" -- otherwise known as the economic stimulus act. We're like most tax professionals in that we're still sorting through the Act's nearly $300 billion in tax cuts to see which will be most valuable for you. But we can tell you that it will take careful planning to make the most of the new rules. For better or for worse, the new administration doesn't seem to be making "tax simplification" much of a priority.

Take the new deduction for sales tax on new cars. The concept is simple enough. The auto industry is a huge part of our economy. Car sales have slowed to the point where General Motors stock costs less than a gallon of gas and carmakers are flirting with bankruptcy. Why not give car buyers a tax incentive to stimulate manufacturers?

The new law says that if you buy (but not lease) a new car between February 17 and December 31 of 2009, you can deduct any state or local sales or excise tax you pay on that purchase. This will be an "above the line" deduction, which means you can take it whether you itemize or not. But, since Washington doesn't want to subsidize millionaires buying Bentleys, the deduction phases out as your "adjusted gross income," or AGI tops $125,000. If you're married, filing jointly, it phases out as your AGI tops $250,000. And the deduction is limited to sales tax on a maximum of $49,500 you pay for just one car. Analysts estimate the new law will save buyers an average of $300 in tax.

So far so good. But:

  • What if you're married, filing jointly, and you and your spouse each buy a new car for $20,000? Can you deduct the tax you pay on both cars? Well, we don't really know.
  • What if you own your own business and you buy a vehicle for work? Can you deduct the tax on your Schedule C, where it saves self-employment tax? Again, we don't really know.
  • What if you're already deducting state and local sales tax instead of income tax? Will breaking out the tax you pay on your new car save you more than just including it with the rest of the sales tax you pay?

As you read the paper or watch the daily news, you're bound to hear about new tax breaks. Keep an ear out for those that sound right for you! But don't assume that what you hear on the news necessarily means saving for you. Call us with your questions to make sure you don't miss any of the new deductions you deserve!

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