Under the new economic stimulus law—the American Recovery and Reinvestment Act of 2009—you can deduct state and local taxes paid to purchase a new vehicle. The rules seem straightforward enough, but watch out for a few interesting twists and turns.

Strategy: Do the tax homework before you buy a new set of wheels. The new vehicle deduction is temporary. It applies to sales made after Feb. 16, 2009, and before Jan. 1, 2010.

Here’s the whole story: The new law allows you to write off sales and excise taxes attributable to the first $49,500 of a new (not used) vehicle’s price.

Note that the new deduction isn’t limited to passenger automobiles. It also covers new motorcycles, new light trucks and new SUVs, as long as you’re the original buyer and the vehicle doesn’t weigh more than 8,500 gross pounds. New motor homes also qualify.

The write-off phases out at relatively modest income levels. The phaseout occurs for an AGI between $125,000 and $135,000 for single filers, and an AGI of $250,000 and $260,000 for joint filers. 

Example: You buy a new car on June 1 for $40,000 in a state where the sales tax is 5%. So you have to pay an extra $2,000 for the car. If you’re a single filer and your AGI for 2009 is $130,000, your deduction is cut in half to $1,000.

You can’t claim the new vehicle deduction if you decide to take the optional state and local sales tax deduction (in lieu of deducting state income tax). Generally, this optional sales tax deduction is based on the amount for your state listed in the IRS table plus sales tax paid on certain “big-ticket items” such as cars. You can’t effectively deduct the sales tax twice.

Go with the biggest overall write-off, but be aware of a few caveats:

Optional sales tax deduction: If the tax rate on the vehicle exceeds the general sales tax rate, the deduction is limited to the general rate and there’s no purchase price limit or separate income limit. Also, there is no requirement for the vehicle to be new (used ones also qualify). For instance, if a vehicle costs more than $49,500, you’re probably better off claiming the optional sales tax deduction. If you live in a state with a high income tax rate, you might opt to write off state income tax and tack on the new vehicle deduction (see box).

Also, the new deduction is allowed in computing the alternative minimum tax (AMT), but the optional sales tax deduction is not. If you’ll be subject to the AMT before taking into account a deduction for state or local taxes, you won’t get any tax benefit if you elect the optional sales tax deduction instead of deducting state income tax. Plus, you’ll forfeit any new vehicle deduction.

Can you claim the new deduction for more than one vehicle? The law isn’t clear on this point, but it’s reasonable that deductions would be allowed on multiple purchases up to a $49,500 limit per taxpayer. So, if you buy one car for $20,000 on July 1 and another for $25,000 on Dec. 1 in a state charging 5% sales tax, you can probably deduct a total of $2,250 (5% of $45,000).

Reverse your tax direction