Tax advantages of buying a new car

Lately, all the new car related news has centered on the "Cash for Clunkers" program. That incentive has now ended but it can still be a good time to buy a new car. The reason is that the deduction for the sales tax paid on a new car purchase continues until the end of this year. Here are the specifics:

You can deduct all the sales tax paid on a car costing up to $49,500.

The deduction can be used multiple times if you buy more than one car.

The deduction phases out for single filers with adjusted gross income (AGI) higher than $125,000 and married filers with AGIs over $250,000.

This deduction can be claimed even if you don't itemize your deductions -- simply add the amount of taxes paid to your standard deduction.

And while we are on the topic of cars, remember that in most cases, if you are considering donating your old car to charity, the amount of your deduction is limited to what the charity can sell your car for. (The exception to this rule is if the charity is going to keep your car and use it themselves.)

Years ago, you used to be able to deduct the blue book value of your car but now, the deduction could be significantly less. Under the new rules, which went into effect with the 2005 tax year, the charity will send you a recepit for the amount they were able to receive at an auction. It might take a while to get the receipt and you can't be sure what your deduction will be until you get the receipt. Keep that fact in mind when trying to decide to trade in or donate your old car and if you do donate your car, be sure to file Form 8283 when you file your taxes.