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With the large cash outlay that you make in buying a new vehicle, do not overlook the potential for the purchase to save you money on your federal income taxes. While the deductibility of sales taxes for vehicle purchases is in doubt as of December 2012, you can deduct some other taxes often associated with vehicle purchases. Most of the tax breaks are available only to filers who itemize their tax deductions.
While sales taxes paid on vehicle purchases were deductible from the years 2009 through 2011, as of December 2012 the law authorizing these deductions had not been extended to the 2012 tax year. The previous law allowed you to deduct either your state and local income taxes, or the sales taxes that you paid throughout the year. The IRS provided tables detailing the deductible sales tax based on your income, but you could add the sales tax paid on a vehicle to this amount.
Many states and local jurisdictions impose a tax when you register your vehicle, based on the age and value of the vehicle. These excise taxes are deductible on your federal income tax return, because the taxes are based on the value of the vehicle and are levied on an annual basis.
You claim vehicle excise tax deductions as itemized deductions on Schedule A of your federal income tax return. Enter the total amount on line 7 of Schedule A, for personal property taxes. If you are filing a return for a previous year and deducting sales taxes, you enter the amount on line 5 and check the box for general sales taxes.
The savings you receive on your federal income taxes by deducting vehicle personal property taxes depends on your tax bracket and the amount of your other itemized deductions. For you to realize any savings, the total of your other itemized deductions must exceed your allowable standard deduction. If you claim a vehicle personal property tax of $800, and are in the 25 percent tax bracket, you save $200 in federal income taxes.