Did you buy a new car last year and are confused with how this new car tax deduction works? Then let’s go over some of the information. This deduction was included in the 2009 stimulus package and basically allows those who buy a new car, light vehicle, recreational vehicle or motorcycle in 2009 to deduct state and local sales tax as well as any excise tax charged in the purchase.

Who does this apply to?

This applies to taxpayers who purchased after Feb 16, 2009 and before Jan 1, 2010.

How does the deduction work?

Let’s say for example you purchase a car for $25,000, and had a trade-in of $5,000. Typically states would tax the difference at $20,000. At a tax rate of 6%, your deduction would be $1200. This would be equivalent to buying a new car at $20,000, with no trade-in. 

***Note: The deduction is limited by purchase price (up to $49,500) and qualifying income ($125,000 for individuals and $250,000 for couples). Also, purchases made in states without a sales tax can also qualify for the deduction. For more information please reference the IRS website Special Tax Break Available for New Car Purchases This Year.

The best part, this deduction is available whether you itemize deductions or not. Here are some common Questions & Answers you may have regarding this deduction.

Make sure to take advantage of this deduction if it applies to you. Then you can take the extra money and drive it straight to the bank! Literally!


Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.