Can You Deduct Taxes Paid on a Vehicle?
Buying a new car involves making decisions that go well beyond how many doors or cylinders the buyer prefers. Consumers have well-defined choices when it comes to financing and whether sales taxes paid are deductible. Those choices come with a range of caveats and limitations imposed by the IRS, and deductions are limited to new vehicles.
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Qualifications
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The federal government permits the deduction of state and local (or excise) sales taxes paid for the purchase of a new vehicle. The IRS considers a vehicle "new" if the taxpayer is the original user of the car. It must be a passenger automobile or light truck with a gross vehicle weight under 8,500 pounds, which also applies to motor homes and motorcycles.
Limits
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The deduction limits for new vehicle taxes depend on both the price and the buyer's income. These limits apply equally to certain fees charged in states without a sales tax. The price limit is $49,500 and that portion of the tax applicable to amounts over this limit is not deductible. Individuals with Adjusted Gross Income (AGI) of more than $135,000, or $260,000 for married couples filing jointly, cannot deduct taxes paid. Individuals earning between $125,001 and $134,999, or $250,001 to $259,999 for married couples, are subject to a reduced deduction, and those earning under these levels can deduct the full amount.
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Itemization
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Individuals or married couples filing jointly cannot deduct state and local taxes paid for new motor vehicles if they choose to itemize general sales taxes on Schedule A (line 5 on Form 1040). This rule exists so that taxpayers cannot benefit twice from such taxes paid.
Standard Deduction
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The IRS permits an increase to the standard deduction for those taxpayers who do not itemize their deductions on Schedule A. This increase can be determined by completing Schedule L on either Form 1040A or the standard Form 1040. Those who live in states that do not charge a sales tax (Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon) can deduct any fees that may resemble a sales tax.
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