Phillips: Sales tax break doesn't apply to all car buyers

Phillips: Sales tax break doesn't apply to all car buyers

January 2nd, 2010 by Ellen Phillips in Business Ellen Phillips

Q: I understand we can deduct sales tax on any vehicle purchased in 2009 up to $40K. Before I begin figuring taxes, are Tennesseans able to also deduct this extra tax since we already can deduct "regular" sales tax? If not, can the auto sales tax be included elsewhere on our return? Finally, does this amount come off the adjusted income or the percentage tax rate under which we fall?

- Thelma Taxwise

A: Dear Thelma: The Kiplinger Tax Letter, one of my right arms, says Uncle Sam takes many taxpayers' interests to heart for their 2008 returns. First of all, a new buyer can deduct the sales tax on more than one vehicle on the first $49,500 of the cost, as long as it was purchased after Feb. 16, 2009, and before yesterday (Jan. 1, 2010). However, don't get too carried away with the IRS' generosity; it imposes a cap for two cars. Let's say each costs $30,000; then the total sales tax you pay for both vehicles qualifies for the break. So far as those of us who live in a state with no income tax, we can also take this break.

But take note: The deduction is available only to families making less than $260,000 (or $135,000 for single filers). Moreover, it's phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers. The benefit begins phasing out for married couples with AGIs over $250,000 and singles with adjusted gross incomes over $125,000 and is completely gone for single filers with adjusted gross income of $135,000 or more or joint filers with AGI of at least $260,000.

It bears mentioning to itemizers who elect to deduct state sales taxes in lieu of state income taxes that you receive no benefit from this change, because the auto sales tax is already included in the sales tax deduction. On the other hand, if you itemize and deduct your state sales tax, you'll get a separate deduction for auto sales taxes; nonitemizers will add the sales tax amount to their standard deduction amount.

I hope each of you enjoys a happy, prosperous, and consumer-savvy New Year!

Editor's Note: Ellen Phillips is a retired English teacher who has written two consumer-oriented books. Her Consumer Watch column appears on Saturdays in the Business section of the paper. An expanded version is at under Local Business. E-mail her at consumer