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New Tax Breaks Have You Reconsidering a Car Purchase?
Susan B. Queary, MAcc, CPA
Principal, Tax Services; Director, Estate Planning Services
March 23, 2009
Maybe you've considered a new gas or diesel car, but couldn't see spending the money in a down economy. Or you intended to make the leap to a hybrid or an alternative fuel vehicle, but couldn't justify the higher price given reduced gas prices―even with a tax break.
If you've held back on buying a new car, whatever the reason, you're obviously not alone. But this year, new and enhanced tax breaks―at both federal and state levels―provide incentives for taxpayers who are considering going green with their vehicles. And if you're planning a car purchase―but not considering a hybrid or alternative fuel vehicle―there is even a federal tax incentive to purchase any new automobile.
However, the timing is critical. The federal incentives expire at the end of this year and the state incentive expires at the end of next year.
Federal Tax Incentives
The recently enacted American Recovery and Reinvestment Act of 2009 provides a number of new and revised tax credits and deductions for vehicle purchases, beginning this year.
 Incentive for New Vehicle Purchases (Not Limited to Hybrids)
If you buy a new car, light truck, motor home, or motorcycle from February 17, 2009 through December 31, 2009, you can deduct the state and local sales and excise taxes you pay on your federal income tax return, whether or not you itemize deductions.
This deduction is limited to the taxes paid on up to $49,500 of the vehicle's purchase price.
For higher-income taxpayers, the deduction begins to phase out with a modified adjusted gross income of $125,000 for single filers and $250,000 for joint filers.
You should know that this deduction is really only of benefit if you do not itemize on your federal return or if you pay state income taxes. For 2009, the IRS also provides an itemized deduction for general sales taxes as an alternative to deducting state income taxes. You cannot take both the itemized general sales tax deduction and the non-itemized sales tax deduction for a new vehicle purchase.
Incentive for Alternative Motor Vehicle Purchases (Hybrid Credit)
As a result of the Energy Policy Act, you are eligible for a federal income tax credit if you purchase a qualified fuel cell motor vehicle, advanced lean-burn technology motor vehicle, qualified hybrid motor vehicle, or qualified alternative fuel motor vehicle. The amount of the credit depends on the type of vehicle you buy.
For qualified hybrid and advanced lean-burn technology vehicles only, the credit phases out based on sales volume.
For a list of qualified hybrid vehicles and related credit amounts for the 2009 model year, refer to http://www.irs.gov/businesses/corporations/article/0,,id=203909,00.html.
An initial list for the 2010 model year is online at http://www.irs.gov/businesses/corporations/article/0,,id=204465,00.html.
Before 2009, taxpayers subject to the alternative minimum tax (AMT) could not benefit from the hybrid credit. However, beginning this year, as a result of the American Recovery and Reinvestment Act, the credit is allowed against the alternative minimum tax.
Incentive for Green Motor Vehicle Purchases
The American Recovery and Reinvestment Act established two new credits, applicable after February 17, 2009 and before January 1, 2012.
If you buy a qualified electric drive low-speed vehicle, motorcycle, or three-wheeled vehicle, you may be eligible for a 10 percent nonrefundable credit―up to a maximum credit of $2,500 per vehicle.
If you convert any motor vehicle into a qualified plug-in electric drive motor vehicle, you're also eligible for a 10 percent credit― up to a maximum of $4,000.
Washington State Tax Incentives
Historically, we've had one of the higher per capita rates of hybrid purchases in the nation. A new state tax incentive may further increase the number of hybrid and alternative-fuel vehicles on our roads.
Beginning January 1, 2009 and extending through 2010, if you purchase or lease a qualifying new passenger car, light duty truck, or medium duty passenger vehicle, your purchase is exempt from Washington's sales and use taxes.
Qualifying vehicles must satisfy either of the following requirements:
be powered exclusively by a clean alternative fuel―such as natural gas, propane, hydrogen, or electricity―that meets both the 2005 California motor vehicle emission standards and the rules of the Washington State Department of Ecology
use hybrid technology and have a mileage rating of at least 40 mpg
To claim the tax exemption, you must retain all receipts and other records necessary to validate your eligibility.
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