Incentives for Car Buyers

We have a son starting college, and he needs a vehicle. Are there any tax (or other) incentives we can benefit from if we purchase a new or used car?

The economic-stimulus package does provide a tax break for people who buy new cars between February 17, 2009, and December 31, 2009. They can write off state and local sales taxes and excise taxes paid on up to $49,500 of a vehicle's cost. (The tax break also applies to light trucks, motor homes and motorcycles.)

The new deduction does not apply to used-car purchases. And it phases out for single taxpayers who have adjusted gross income between $125,000 and $135,000 and for married couples filing a joint return who have AGI between $250,000 and $260,000. If your AGI is halfway through the phase-out range, for example, your sales-tax deduction would be cut in half.

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If your son buys the car, his AGI will come into play for this restriction; if you buy it for him, your AGI will be used. Also note that if your son buys the car, he'll deduct the tax on his return.

The deduction can be claimed on 2009 tax returns regardless of whether you itemize or claim the standard deduction. However, if you itemize and deduct state sales taxes rather than state income taxes (because you live in a state that doesn't have an income tax, for example), this new break has no value for you. You already get to deduct the sales tax on cars (even if you buy a used one), and Congress made it clear that no double-dipping is allowed.

If you live in a state that doesn't have a sales tax -- such as Alaska, Delaware, Hawaii, Montana, New Hampshire or Oregon -- you still get a tax break if your state imposes a flat fee on the purchase of vehicles or a fee based on the price you pay. If you pay such a fee when you buy a new car between February 17, 2009, and December 31, 2009, you can deduct it, subject to the same income restrictions that apply to the sales-tax write-off.

In addition to the new tax breaks, it's a particularly good time to shop for a new car -- especially at GM dealers that are closing. See Grab a Deal on a GM Vehicle for more information. (Chrysler is offering some good incentives now, too, but the best deals were available before the company closed 789 dealerships on June 9).

For help finding a new car, see our Car Buyer's Guide. For advice on buying a car for kids, see Edmunds.com's Young Drivers Guide.

Although you can't get the economic-stimulus tax write-off for used cars, you can get some good deals. See our 10 Best Values in Used Cars for 2009 slide show. Also, if your son has an old gas-guzzling car that you don't trust as a college car, there's a chance you could be eligible for a voucher to help you buy a more fuel-efficient car through the government's new "Cash for Clunkers" program. For more information on how the program works, see Don't Count on Cash for Clunkers.