How the 2009 New Car Tax Credit Works

New Car Credit Eligibility Dates
The credit applies to new cars purchased between February 17, 2009 and December 31, 2009. That means the purchase must be completed, not that you?re working on a deal on December 31. If you completed the deal on February 16, you?re out of luck.

Qualifying Vehicles
New cars, light trucks, motor homes, and motorcycles qualify. Used or pre-owned cars do not, even if it?s ?new to you.?

Qualifying Purchase Price
Here?s the tricky part. The credit is limited to the taxes on vehicles with a purchase price up to $49,500. You can buy a more expensive car than that, but you can only deduct the taxes on $49,500 of it. That?s still a pretty penny if you live in a high sales tax state.

Qualifying Income
The income limit is high enough that nearly everyone will qualify. The credit starts to phase out at $125,000 for individuals and $250,000 for couples. Once you reach $135,000 and $260,000, respectively, you no longer qualify.

Eligible Taxes
Although there was initial talk of including loan interest, the credit is limited to the sales, local, and excise taxes associated with the purchase. The IRS estimates that will be about $1,500 on a $25,000 car, but it does depend on the prevailing tax rate in your state and city.

How to Claim the New Car Tax Credit
You don?t receive the credit when you buy the car, so you should still bargain for the best deal you can get. You?ll receive the credit when you file your 2009 taxes, which are due on April 15, 2010. The credit is considered an ?above the line? credit, so you don?t need to itemize to receive it. It also reduces your taxable income, rather than the tax due. That means your total savings will be more than the credit itself.

The Bottom Line
Here?s the bottom line: the credit may or may not be worthwhile to you. If you were considering a late model used car, then you need to compare the difference in price of the used car and the new car, as well as the taxes on the new car. If the used car is significantly cheaper than the new car, the credit may not actually save you money. However, if the difference in price is about the same as the tax on a new car, then the credit could ultimately make the new car a better deal. With the new car, you?d not only receive the credit, but you?d avoid major maintenance and repair costs for longer. However, you do need to factor in higher loan payments, registration fees, and insurance costs.