Automobile Financing

New vehicle purchase tax deduction deadline days away

by Broderick Perkins

Don't overlook the cost of financing when you rush out to beat the tax deduction deadline on new car purchases.

"While tax breaks and other year-end deals like automaker rebates and incentives can make this an attractive time to buy a new car or truck, consumers should also evaluate their financial situation," says Eric Hoffman, spokesman for AWARE, Americans Well-informed on Auto Retailing Economics, a vehicle financing trade group.

"As with any major purchase, an incentive or sale should be weighed as part of the whole process. Those who decide to buy a vehicle should set a budget, comparison shop and understand common financing terms," he added.

Consumer Reports also says a guaranteed auto loan in your pocket, rather than obtaining financing in the check out line also helps you avoid a common sales tactic -- mixing vehicle price and financing negotiations.

Says Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker, "Better to arm yourself with separate vehicle price information and auto loan financing options before you enter the dealership so you can best protect yourself in the negotiating process, similar to the way you would if you were purchasing a home."

The American Recovery and Reinvestment Act permits taxpayers to take a deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles, according to the Internal Revenue Service (IRS).

AWARE advises checking with a tax professional to determine how the new vehicle purchase tax deduction affects your bottom line.

The IRS offers additional information on a"Car Sales and Excise Tax Deduction: Questions and Answers" web page.

The deduction is available on new vehicles purchased from Feb. 17, 2009, through Dec. 31, 2009. If your state doesn't have a sales tax, the law provides a deduction for other taxes or fees paid. This deduction is available whether or not a taxpayer itemizes deductions on Schedule A.

The deduction is limited to the taxes and fees paid on up to $49,500 of the purchase price of an eligible vehicle.

The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000.

Taxpayers with higher incomes do not qualify.

The tax deduction may not be around in 2010, but buy a car solely to cash in on the tax deduction, without considering the cost of financing and you could pay more than necessary in finance charges. That could offset the financial benefit of the deduction.

Zero-financing or reduced-rate financing subsidized with a low APR from the auto manufacturer can land you the best deal, but only on certain makes and models.

Compare interest rates at various financial institutions, such as banks, thrifts, and credit unions, as well as the dealership.

If you've got home equity available, include a home equity line of credit (HELOC) or home equity loan in your comparisons.

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