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Missed out on ‘Clunkers?’ There are still breaks

Missed out on Cash for Clunkers? Uncle Sam still has a few bones to throw your way if you buy a car before the end of the year.
/ Source: The Associated Press

Missed out on Cash for Clunkers? Uncle Sam still has a few bones to throw your way if you buy a car before the end of the year.

Both tax credits and deductions are available on new car purchases made before Dec. 31.

The tax relief won't rival what you might have received if you traded in your gas guzzler, but it can help lower your tax bill — or boost your refund — when you file your return in April.

And if you combine your tax breaks with some savvy negotiating, you can get a decent deal.

Sales tax deduction
All buyers, including those who took advantage of Cash for Clunkers, are eligible to deduct their sales taxes. The federal stimulus bill included a deduction for the sales tax and other fees charged on any new car purchase made after Feb. 17 and before Jan. 1.

It's not a huge incentive, said Arthur Bloom, a tax partner at Marks, Paneth & Shron in New York City. But it's not pennies, either.

Bloom estimated that someone who buys a $30,000 car in a state like New York with an 8 1/2 percent tax rate would pay about $2,600 in sales tax. If in the 25 percent tax bracket, the taxpayer would save about $635.

"I don't know if that's enough for somebody to say, 'OK I'm going to go spend $30,000,'" Bloom said. "But it certainly reduces the cost of acquiring a car."

There are some caveats. The deduction begins to phase out for those who earn $125,000 a year ($250,000 for married people filing joint returns), and is eliminated for people who earn $135,000 ($260,000 for joint filers). What's more, the deduction is limited to the first $49,500 of the purchase price.

If you live in one of the states that doesn't have sales tax — Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon — you can deduct any fees imposed by state or local governments.

The sales tax deduction is available whether or not you itemize your return, because it can be added to the standard deduction. And it can be claimed whether you bought a car, truck, motorcycle or even a motor home. There's no limit to how many vehicles you can claim, as long as each purchase was made in the right time period.

Hybrid vehicle tax credit
On top of the sales tax deduction, people who buy certain hybrid vehicles can also get a tax credit.

Tax credits are even more appealing than tax deductions because they are subtracted from any tax you owe.

Hybrid credits have existed since 2005, and there are limits to how many of each model is eligible. Those models that hit the market early and quickly became popular, like the Toyota Prius, are no longer eligible. But there are a number of vehicles that qualify from 2009 and 2010.

The 2009 models include certain Chrysler, Dodge, Mazda and Saturn hybrids, which qualify for credits between $1,550 and $2,200.

For 2010 models, there are credits between $650 and $2,350 for certain SUVs and trucks made by Ford, Mercury, Chevrolet, Cadillac and GMC, and for specific sedans from Chevy and Nissan.

A list, last updated Oct. 9, of the eligible cars is available on the Internal Revenue Service Web site, at

Tax credits are also available for a handful of "lean burn" technology vehicles. These are cars or light trucks with engines designed to use less fuel, and are mostly diesel-using luxury models from Germany. For the 2009 model year, credits between $800 and $1,800 can be claimed for certain Audi, BMW, Mercedes and Volkswagen models. For 2010 models, specific Audis and Volkswagens qualify for credits between $1,150 and $1,700. The IRS Web site has a list of the various models.

Get informed before you shop
Before heading to a dealer intent on taking advantage of one of these tax breaks, prospective car buyers should also do some research on the models that interest them.

Consumers who don't do their homework end up paying higher prices, said Jesse Toprak, an industry analyst with

This week Toprak released his second monthly report tracking various sales data, in which he analyzes to determine which models are easiest to negotiate price on, and which brands are linked with the biggest sales incentives.

The report also predicts that Halloween will be the best day to buy a car in the next four weeks. He based the prediction on historical sales data — the popular belief that it's easier to get a good deal at the end of the month has some merit — and on metrics like the inventory in dealer lots.

But Toprak said car buyers who arm themselves with information and ask dealers for better prices don't really have to wait. "They'd rather sell it to you now," he said. "Ask for similar discount, and nine out of 10 times, you'll get it."