For many individuals, September means it is time to look for a new car since the upcoming year’s automobile models are introduced.
For anyone who is considering purchasing a new car for personal use, there may be a federal income tax benefit available for your new ride.
In making this analysis, it is important to remember that you may be able to deduct the sales tax on major purchases such as automobiles, motorcycles, boats and campers if you are itemize your tax deductions. Under the new Tax Cuts and Jobs Act implemented at the end of 2017, the itemized deduction for either state and local income taxes or state or local general sales taxes is limited to $10,000. While many taxpayers may no longer be itemizing their deductions, they may be able to take advantage of the increase in the standard deduction to $6,000 for an individual and $12,000 for a married couple.
Individuals who do not live in a state that has income tax, such as Florida, and made a major purchase should consult with their tax advisors.
In addition, the deduction for sales tax on major purchases can also benefit taxpayers who pay more in sales tax than they do in income tax. Here’s how it works:
Taxpayer A is an individual who lives in Florida, a state without income taxes, and is in a 25 percent federal tax bracket. He plans to buy a new personal use car, on which he will pay $3,500. He expects to itemize his tax deductions based upon the benefits he receives for medical expenses, mortgage interest paid and charitable contributions, even before taking the deduction for the sales tax into account. Assuming the taxpayer elects to itemize their tax deduction for state and local general sales tax, he receives a federal itemized tax deduction for $1,135 (25 percent of $3,500).
On the other hand, if taxpayer A was not anticipating the ability to itemize his deductions for federal income tax purposes before considering the sales tax, the outcome would be different. Assume taxpayer A’s other itemized deductions for medical expenses, mortgage interest and charitable contributions were $2,000 less than his allowable standard deduction of $6,000. In calculating the additional tax benefit available for the sales tax on the auto purchase, you would compare the pre-sales tax amount of the itemized deduction to include the sales tax. In this example, the net additional benefit would only be $375 (25 percent of the excess of $3,500 over $2,000).
While most people have heard about the limitation of federal itemized deductions for taxes, which may seem relatively simple, each taxpayer’s circumstances should be evaluated in consideration of still having the option to take a deduction for state and local income taxes, versus state and local sales tax. Clear as mud right?
Give your tax team a call if a new personal auto purchase is in your budget for 2018 and we would be happy to assist in determining whether any additional federal tax benefit may exist.