IRS scraps state sales taxes for new car purchases

In a bid to stimulate the stagnating U.S. economy and give the domestic car market a boost, the Internal Revenue Service (IRS) has announced that taxpayers who buy a new passenger vehicle this year may be entitled to deduct state and local sales and excise taxes paid for the vehicle when they file their tax return next year.

“For those thinking about buying a new car this year, this deduction may give them a little more drive to make their purchase this year,” said IRS Commissioner Doug Shulman. “This deduction enables taxpayers to buy now and get cash back later on their tax returns.”

The news means that in many states cars will become around 5-6% cheaper on average, while particular states such as California may have sales and local taxes of up to 9.25%. The announcement comes with some strings though, and the deduction is limited to the state and local sales and excise taxes paid on only up to $49,500 of the purchase price of a new car, light truck, motor home or motorcycle.

Also, the amount of the deduction is phased out for taxpayers whose income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers. Additionally, the vehicle must have been purchased between the dates of February 16, 2009, and January 1, 2010, to qualify for the deduction.

The tax breaks are part of a greater package being introduced by the Obama administration, which you can read about by clicking here.