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Buying a car is never very easy, especially when it comes to paying sales tax. You don't hear much about this from the dealer until the purchase agreement arrives, and reveals a large additional charge on your new car. Some states even set a higher rate of sales tax for vehicles than for other purchases. The upside: the IRS may allow you to deduct sales tax under certain circumstances.
Deductible Taxes and Fees
The IRS allows you to deduct sales tax you paid on a car purchase by itemizing on Schedule A on Form 1040. If you don't itemize, you can't deduct sales tax. You may deduct the tax whether it's charged on a new or used car, and whether you buy from a car dealer or a private party. Other examples of deductible taxes include state income taxes, property taxes, and car registration fees you pay every year to keep your wheels legally on the road.
Sales or Income Tax
The IRS does not allow you to deduct sales tax as well as state income tax. Not all states levy an income tax, and allowing the deduction of sales taxes allows residents in those states another opportunity to deduct taxes they've paid elsewhere. If you live in a state that imposes both income tax and sales tax, you must choose which to deduct. In addition, if your state levies a higher tax rate on vehicles, you can't deduct the full amount; you can only deduct sales tax at the "general rate" that applies to other purchases. For example, if your state imposes a general sales tax of 6 percent but a higher sales tax on cars of 8 percent, you can deduct only $1,200 in sales tax on a $20,000 car, not the full $1,600 you paid.
Documenting Tax Payments
The purchase agreement you sign at the dealership constitutes your proof that the sales tax was paid in the year you're claiming it for. If you claim a deduction for sales tax, you should keep the agreement in a safe place, in case the IRS asks for proof that you paid it. For sales tax deductions, you can either claim the amount you paid over the year -- which means keeping a lot of receipts -- or take a standard deduction set by the IRS. This amount varies with sales tax rates in each state, as well as your income level and exemptions. Even if you choose the standard sales tax deduction, the IRS allows you to add sales tax paid on "big-ticket" items such as cars, boats and airplanes.
Changes in Tax Law
At the time of publication, the law on sales tax deductions expired with the 2011 tax year and was up for renewal by Congress. It may or may not be extended for 2012 and beyond, depending on negotiations on Capitol Hill. Some observers, including the accounting and tax advisory firm of Clifton Larson, believe that an extension is likely.
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