Thanks to the American Reinvestment and Recovery Act of 2009 everyone buying a NEW CAR in 2009 gets to deduct the SALES TAX paid on their 2009 federal income tax.  PLEASE REMEMBER this information when traveling out to purchase your new car and thank-you for helping to STIMULATE the economy!

The AR&RA is great for everyone except those living in states without SALES TAX or anyone buying a used car, BUT WHAT ABOUT THE NEW CAR BUYER TRADING IN AN OLD CAR????

In some states the new car buyer gets a TAX CREDIT equal to the % of the current sales tax basis, for the appraised value of the trade-in. That means if you trade a car worth $10,000.00 and your present sales tax is 7.75%, you have a credit coming to you of $775.00!

This credit is applied to the sales tax being charged on the NEW PURCHASE. SO, on a new car costing $30,000.00, the sales tax at 7.75% is $2,325.00.  Apply the credit of $775.00 and the NET sales tax is  $1550.00.

YOU, THE TAX PAYER, SHOULD be DEDUCTING the ENTIRE (PRE-CREDIT) amount of example: $2,325.00.   The fact that you “PAID” some of the tax by credit, should not reduce the amount of your tax deduction.

However, on some automobile purchase contracts the credit may be noted as additional DOWNPAYMENT and only the NET tax will be shown.  Be sure you recieve documentation reflecting the TOTAL TAX on the ENTIRE NEW CAR PURCHASE for tax reporting purposes at year end.  Get the paperwork at time of purchase, because trying to get it from the dealership at year-end will be a major debacle.

The same can be true of the person trading multiple vehicles valued at MORE than the cost of the NEW CAR(s).  Make sure all the tax is accounted for on the NEW car purchase, even if the sales tax credit covers the entire amount of the sales tax due. This would happen when the multiple cars value exceeds the cost of the new car, including tax and fees.

In some states the sales tax credit for a trade-in is less than the tax charged on the new car purchase. The example ,as noted above, applies, only the amount (sales tax credit percentage of appraised amount) of “tax credit applied” will differ.

Lease customers can look to their monthly bill for the sales tax billed , and deduct the year’s worth of sales tax on their new car purchase.

For more information on the President’s position with the nations automakers click here:President OBama tells carmakers.


Sarah Lee is an automotive executive with 20+ years of experience. She writers about Cars, and is a staunch consumer advocate on car related subjects. Her company: MY CARLADY is a car buyer’s service committed to getting you the best deal on your next new or pre-owned vehicle. You can reach her at


  1. Question on auto sales tax in NJ. We just signed a sales contract based on cash for clunkers in NJ and found that the dealer wrote the contract and estimated (charged us) taxes based upon the MSRP and not the sales price agreed upon or using the cash for clunkers trade in of $4500. The red sales sticker price on the 2009 car was $15,300 not 18300 etc but 7% was charged on $18300. Should not the tax have been charged on the actual sales price of $10,555 rather than the msrp that was never even discussed?

  2. Will buyers be required to pay taxes on the $4500 cash for clunkers trade in to state taxing authorities? Looks like NJ auto dealer we purchased from taxed us as the tax was figured on MSRP?

    • the sale price and fees are what your tax is based on. If the dealership added the 4500 rebate to the selling price and then took it off in the rebate line, you are correct, you got taxed, you also got nothing for the trade in, unless he showed more on the trade-in line.
      Since none of the dealers are authorized yet, the dealership basically gave you X for the car, not waiting to be reimbursed under the CARS program.

      • BTW- you are not subject to federal income tax on the rebate. Having a trade-in of 4500.00 should give you some sales tax credit in most states. The dealership “estimating” sales tax on the rebate is pulling a SCAM to get more profit by adding the “restimated tax” to the selling price. Futhermore, MSRP has NOTHING TO DO with it.

        I think dealerships advertising the CARS program and telling consumers they are getting the $4500.00 from the govement program NOW, are setting themselves up to be banned from suthorization, as consumers need to COMPLAIN to the about the specific dealerships and their tactics.

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