A provision in the recent Stimulus Act provides that qualified motor vehicle taxes are deductible as either an itemized deduction or as a component of the standard deduction. The Stimulus Act establishes a temporary itemized deduction equal to the amount of state and local sales and excise taxes paid on a qualified vehicle purchase between February 17, 2009 and December 31, 2009. However, the additional itemized deduction is limited to taxes allocable to the first $49,500 of the purchase price.
The new law also establishes a temporary add-on standard deduction with similar conditions and limitations for individual taxpayers who don’t itemize. The add-on standard deduction, but not the itemized deduction, is allowed for both regular tax and AMT purposes.
The new itemized and add-on standard deduction write-offs are only available for state and local sales and excise taxes on new (not used) (1) passenger autos and light trucks with gross vehicle weight ratings of 8,500 pounds or less, (2) motorcycles, and (3) motor homes.
Note the additional itemized deduction is not allowed to an itemizing individual who elects to deduct state and local sales taxes in 2009 in lieu of deducting state and local income taxes. Electing taxpayers can effectively claim itemized deductions for state and local sales taxes on new (or used) vehicle or motor home purchases anyway-without regard to the $49,500 purchase price limitation. So the new itemized deduction privilege under the Stimulus Act is generally redundant for these individuals. However, the new add-on standard deduction provision is allowed for AMT, whereas the amount deducted in lieu of state and local income taxes is not.
The additional itemized deduction or new add-on standard deduction (whichever applies) is subject to phase-out provisions. The phase-out range for unmarried individuals and married individuals who file separately is between modified adjusted gross income (MAGI) of $125,000 and $135,000. The phase-out range for married joint-filing couples is between MAGI of $250,000 and $260,000. For this purpose, MAGI is regular adjusted gross income (AGI) increased generally by tax-exempt income from outside the U.S.