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U.S. New Car Tax Break Expands to Include all 50 States

Previously under the American Recovery and Reinvestment Act of 2009, taxpayers who buy a new car this year were entitled to deduct state or local sales or excise taxes paid on the purchase. Today the U.S. Treasury announced the offering will expand to include states that do not charge sales tax.

"Building on the Recovery Act, the Treasury Department is taking steps to make sure every American, in every state, qualifies for a tax deduction when purchasing a new car," said Neal Wolin, deputy treasury secretary.

The vehicle must be purchased between February 16, 2009 and January 1, 2010 to qualify for the tax break. The deduction is available regardless of whether taxpayers itemize on their returns. New car purchasers must claim the deduction on their 2009 tax returns filed next year. The deduction is limited to the fees and taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home, or motorcycle.

The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

Now new car buyers in states such as Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon, can also qualify for the deduction. However, states charge various sales tax percentages, which begs the question: What percentage of the purchase price will buyers in states that do not charge sales tax will be able to deduct?