In an effort to drive traffic to dealerships and boost new car sales, the recently passed American Recovery and Reinvestment Act offers a tax break to individuals who purchase a new car on or after February 17, 2009.

Tax Deduction:

Purchasers of new vehicles for the remainder of 2009 are eligible for an above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase.

For example, assuming a four percent sales tax on a $40,000 new vehicle, the above-the-line reduction would equal $1,600.

The new law puts two limits on this new deduction:

1. Deductible sales or excise taxes cannot exceed the portion of the tax attributable to the first $49,500 of the purchase price of any one vehicle.
2. Any deduction will be phased out to the extent the purchaser has adjusted gross income exceeding $125,000 ($250,000 for joint returns).

*Any newly purchased domestic or foreign vehicle, including cars, SUBs, light trucks or motorcycles, first used by the taxpayer that weighs no more than 8,500 gross pounds, generally qualifies.

Sales taxes paid on a lease agreement are not included.