IRS Adds New Car Sales Tax Break To 6 States

WASHINGTON (AP) -- To help boost car sales, the Obama administration announced Thursday it is expanding a tax break on new car sales to six states that don't have sales taxes.

The economic stimulus package enacted in February makes state and local sales and excise taxes on new cars purchased this year tax deductible. The Obama administration has interpreted the new law to include certain fees charged to new car buyers in six states without sales taxes. The states are Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon.

The fees "may not be called sales taxes or excise taxes, but we determined they act the same way," said Michael Mundaca, acting assistant treasury secretary for tax policy.

Qualifying fees must be assessed on the purchase of the vehicle. They can be based on the sales price or be a flat fee per vehicle, the Internal Revenue Service said.

For example, in Delaware, car purchasers are required to pay a document fee when registering a title with the Delaware Division of Motor Vehicles. The fee is 3.75 percent of the purchase price.

"It was always Congress' intent for the document fee to be eligible," said Sen. Tom Carper, D-Del.

The federal government has poured billions into Chrysler and General Motors in an attempt to help save the struggling auto industry. GM is in Chapter 11 bankruptcy protection and Chrysler has just emerged after being taken over by Fiat Group SpA of Italy.

Officials hope the tax break will increase demand. To qualify for the deduction, new cars must be purchased between Feb. 16 and Jan. 1. Taxpayers can claim the deduction on their 2009 tax returns, regardless of whether they itemize deductions.

The deduction is limited to taxes and fees on the first $49,500 of the purchase price of a new car, light truck, motor home or motorcycle. The deduction is phased out for individuals with incomes between $125,000 and $135,000, and for joint filers with incomes between $250,000 and $260,000.

The Joint Committee on Taxation projects the deduction will save car buyers $1.7 billion.

"This tax deduction not only increases support for the auto industry as it seeks to rebuild, but also puts money back into the pockets of hardworking Americans," said Neal Wolin, deputy treasury secretary.

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