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What is a New Car Tax Credit?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 September 2016
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A new car tax credit is a plan that allows taxpayers to receive a deduction or credit on their taxes for purchasing a new car in the previous fiscal year. There are several reasons that a new car tax credit may be initiated by a government, including to stimulate the economy and reduce dependence on oil. A new car tax credit will typically feature several qualifying factors that must be met before the credit can be claimed.

An important distinction on this type of tax break is whether it is truly a tax credit or a tax deduction. A tax deduction allows taxpayers to lower the amount of income for the previous year by a set amount. For instance, if a new credit break allowed a person with a $35,000 US Dollar (USD) income to take a $400 USD deduction, he would only be taxed on $34,600 USD of income instead of the full amount. A tax credit goes directly to reducing the amount of tax owed; if a person owed $900 USD in income tax, a $400 USD new car tax credit would mean that he or she would only have to pay $500 USD. The 2009 new car tax credit enacted by the US government was in truth a deduction, rather than a credit.

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Not all new car purchases may be eligible for a new car tax credit. There is often an income cap on the purchaser that excludes wealthier car buyers from receiving the credit. A maximum cap may also be placed on the purchase; while buyers who buy cars above the cap can still receive the credit, they can only receive it on the price paid up to the cap. If a cap was set at $30,000 USD, a taxpayer who buys a $50,000 USD car could only claim a credit for the first $30,000 USD of the purchase. Usually, cars must also be newly manufactured; a pre-owned purchase will usually not qualify for a new car tax credit.

New car tax credits can be confusing, because they usually are figured based on the amount of tax paid on the car, not the purchase price of the car itself. When a car is purchased, the buyer pays the sticker price plus any applicable taxes, such as state or excise taxes. If five percent of the total purchase price went to taxes, that may be the amount given as a credit. Since tax credits are often done on a federal level, this means that higher tax regions will receive higher credits.

A new car tax credit is not a constantly offered feature in most regions. Governments may put it in place selectively, when economic stimulus is needed. Visiting the government's tax bureau website or offices can give information as to whether this type of credit is available for a certain tax year.

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