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Get a Tax Break on a New Car

If you think the great deals and incentives automakers are currently offering on new cars still don't boast enough savings to get you into the showroom, Uncle Sam has a program that just might.

As part of the recently-passed stimulus bill, new-car buyers can deduct the state and local sales and excise taxes on their purchases. The program doesn't just apply to cars - motorcycles, light trucks, and RVs are covered as well. The goal is to make new cars and trucks more affordable, leading to higher sales and economic recovery. For individual buyers, a hefty tax deduction may be just the motivator they need to take a new car home. Keep reading to see how you can take advantage of the program.

What to Buy

The tax break is available on any make or model car, light truck, RV or motorcycle. Contrary to what you might think, that includes imports. The deduction doesn't just apply to 2009 or 2010 model year cars. Believe it or not, some dealers have new 2007 and 2008 cars on their lots. To get the tax break, the car must have never been titled before. While that rules out used cars, it applies to never-titled older model year cars. If you can find one of these, you can save on the purchase price and get the new tax break.

The one restriction is the new car's price. Unfortunately, you won't be able to deduct all the taxes you'd pay on that new Bentley. Buyers can only deduct the taxes on up to $49,500 of the vehicle's purchase price. That means that if you buy a Honda Fit at $15,000, you might be eligible to deduct all of the local sales taxes. However, if you pay $80,000 for a new Porsche 911 Carrera, you'll only be able to deduct the sales taxes on $49,500 of the purchase price.

When to Buy

The tax break only applies to vehicles purchased between Feb. 16, 2009 and Jan. 1, 2010 - so if you've bought a car between February 16 of this year and now, you can claim it. You cannot claim the deduction on your 2008 tax return. Instead, you'll have to save it for 2009.

Who Can Take Advantage?

The deduction is available to the vast majority of taxpayers and new-car buyers, but the amount of the deduction you'll get depends on your income. Taxpayers with incomes less than $125,000 when filing individually, or $250,000 for married couples, are eligible for the full deduction. Taxpayers with higher incomes are eligible for a reduced deduction.

How Much Will You Save?

The amount of money you'll get back depends largely on your income and where you live. For example, Texas charges a new-car sales tax of 6.25 percent, while Virginia charges new-car buyers three percent of the vehicle's purchase price. That means that on a $33,000 Chevrolet Silverado, the Texas buyer will be able to deduct $2,062 from their 2009 federal tax return, while the Virginia buyer will be able to deduct a little under a thousand dollars.

No matter how much you're eligible to deduct, the government is hoping that any tax savings is enough to push reluctant buyers back into dealerships and behind the wheels of new cars.