Under the heading, "Nothing in the tax law turns out to be easy," add the temporary motor vehicle sales tax deduction enacted in the 2009 Recovery Act. The concept sounds simple enough: Give consumers a tax incentive to purchase new vehicles in an effort to help the ailing auto industry. Its execution, however, has left many tax advisors scratching their heads over the number of issues that have been raised in connection with this new deduction.

BASIC RULES

An individual is permitted to claim a deduction from gross income with respect to "qualified motor vehicle taxes." The amount of the deduction is limited to the portion of the state sales or excise tax imposed on the first $49,500 of the purchase price of the vehicle.

A qualified motor vehicle is a passenger vehicle, light truck or motorcycle that has a gross vehicle weight rating of 8,500 pounds or less, or a motor home of any gross vehicle weight. The purchase must be of a new, not a used, vehicle and must take place on or after Feb. 17, 2009, and before Jan. 1, 2010.

The motor vehicle sales tax deduction is treated as an increase in the standard deduction for those taxpayers who otherwise choose to take the standard deduction. Those who itemize deductions take this new deduction as an additional itemized deduction or forego it in favor of deducting all sales taxes paid in lieu of state and local income taxes.

DOLLARS RESTRICTIONS

One immediate issue is whether the deduction is computed on only one vehicle per taxpayer on a purchase having a maximum price of $49,500; a maximum combined sales price of $49,500 on all vehicles purchased; or a maximum $49,500 sales price for each vehicle if more than one is purchased. While even money is on the third option, the IRS had yet to rule at press time.

The modified adjusted gross income limits ($125,000/$250,000) placed on the deduction point to a maximum tax benefit of 33 percent for joint files and 28 percent for others under the 2009 tax brackets. Assuming an atypically high sales tax rate of 6 percent, and a maximum sales price for all vehicle purchases capped at $49,500, a maximum $980 tax benefit for joint filers and $832 for others is gained by this new deduction.

SALES TAX DEDUCTION

By not making the motor vehicle sales tax deduction an above-the-line deduction, Congress chose not to allow the deduction to influence other tax benefits that are themselves limited or otherwise measured by adjusted gross income.

While careful not to allow the deduction this additional advantage, however, Congress apparently did not show equal concern for taxpayers in low- or no-state-income-tax jurisdictions who elect to deduct state and local sales tax in lieu of state and local income taxes when itemizing their deductions. The Emergency Economic Stabilization Act of 2008 extended the election to deduct state and local general sales taxes in lieu of state and local income taxes through Dec. 31, 2009.

Under a general concern over "double dipping," those individuals who itemize sales tax on their returns cannot also take the new sales tax on motor vehicles deduction again as an additional deduction. The strategy for those taxpayers, therefore, is reduced to determining whether the standard deduction with additions for the vehicle sales tax deduction (as well as any special real property deduction of $500/$1,000 and disaster loss deduction) exceeds what their itemized deductions otherwise would total.

Taxpayers who itemize all sales taxes, however, should note that they are not limited to the $49,500 purchase price cap, nor to the AGI phase-out limits imposed under the 2009 motor vehicle sales tax deduction. They may deduct the full amount of the sales tax (to the extent that it does not exceed the general sales tax rate) and may do so in addition to electing to use the IRS standard sales tax tables. If this taxpayer is also vulnerable to the Alternative Minimum Tax, however, any decision should recognize that the new motor vehicle sales tax deduction might be used to reduce AMT, while an in-lieu-of sales tax deduction cannot.

Also stirred into the mix for itemizers filing joint returns is the phase-out of itemized deductions under the so-called Pease limitation. 2009 is the last year that the Pease reduction is on the books. It starts when AGI exceeds $166,800 for married taxpayers filing jointly, single taxpayers, and heads of households, and $83,400 for married taxpayers filing separately. Thus, the Pease limit is within the AGI range for joint filers who may claim the motor vehicle sales tax deduction. (The operative qualifier here, however, is "may," since there also is some debate as to whether those who itemize deductions can take the new motor vehicle sales tax deduction by taking it as an additional standard deduction without taking the basic standard deduction; again, the IRS needs to sort this out.)

The addition of "excise taxes" to the list of taxes deductible on motor vehicles was included based on the description of the sales tax on motor vehicles in many local jurisdictions as an excise tax. That tax apparently also includes registration fees but, presumably, does not include the federal gas guzzler excise tax for purposes of the new deduction.

QUALIFIED MOTOR VEHICLES

The sales tax on any "qualified motor vehicle" qualifies for the new deduction. While original use of the vehicle must commence with the taxpayer to be a "qualified motor vehicle," there is no requirement that a particular model year be purchased (a 2008, 2009 or 2010 model year vehicle will do, as long as it is new).

There is a question over whether dealer "demo" vehicles are considered new or used. Consensus is that as long as the vehicle has not yet been registered for personal use under state motor vehicle department rules, it can be considered new for purposes of the sales tax deduction. Here again, the IRS had not officially weighed in.

In better times, taking delivery of a new vehicle abroad and using it while on vacation had been advertised as a way to convert a new vehicle into a used one for lower import duties and use taxes. For purposes of the new deduction, foreign sales taxes are not deductible and any use tax due on re-entry into the U.S. presumably would be imposed on a used vehicle, thus removing that payment, too, from the new sales tax deduction.

Also being questioned is what items may be included in the purchase price of a new vehicle. Do dealer or manufacturer extras such as pinstripes or fancy wheels, "free regular maintenance," additional warranties, or even commitments to waive car payments in the event of a purchaser losing their job constitute part of the purchase price for purposes of computing the sales tax deduction?

Fortunately for the tax advisor, consensus is that it is left to the state and local taxing authorities to figure it out, with any uniform sales tax that is charged on what they consider the vehicle's purchase price being good enough for federal tax purposes.

CONCLUSION

The good news is that, as a 2009 tax year deduction, return preparers will not be grappling with many of the finer points of the new vehicle sales tax deduction until early 2010. The bad news is that many consumers are counting on this additional "refund" immediately, by adjusting withholding or estimated tax payments, or by an uninformed expectation that somehow the amount of cash needed to take delivery immediately will be reduced. The Joint Committee on Taxation itself apparently thought so, scoring the deduction at the time that the 2009 Recovery Act was passed at $424 million in 2009 and $1.2 billion in 2010.

Hopefully, there will be enough vehicle sales over the remainder of 2009 to bring all the issues raised by this "simple" motor vehicle sales tax deduction into play, with quick - and liberal - resolution by the IRS also forthcoming.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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