Merry CARistmas

While the federal "cash for clunkers" program grabbed headlines earlier this year, there's another U.S. government program still in effect designed to put money in the pockets of new car buyers.

The enormously successful cash for clunkers program -- officially known as the Car Allowance Rebate System (CARS) -- helped consumers trade in gas guzzlers for more fuel-efficient vehicles. Nearly 700,000 consumers did just that in fewer than 30 days, claiming all the rebates by late August. Consumers who didn't get to take advantage of the program may have felt like a window of opportunity had closed.

However, a lesser-known federal car sales and excise tax deduction continues to offer an extra incentive to buy a vehicle now. The sales and excise tax deduction is -- like CARS -- part of the federal stimulus package. But, unlike the short-lived CARS, this tax deduction continues through the end of 2009. Specifically, it allows many car buyers to deduct state and local taxes paid on the purchase of a new passenger vehicle from their federal income tax. With the economy trending upward, consumers may feel ready to make new car purchases that they had postponed. This tax deduction offers an extra carrot to do that before the end of the year.

Here are some key questions and answers about this deduction from IRS.gov:

Q. What are considered to be "qualified motor vehicles" for the purpose of this deduction?

A. A qualified motor vehicle is a passenger automobile, light truck or motorcycle which has a gross vehicle weight rating of 8,500 pounds or less. A motor home is also considered a qualified motor vehicle.

Q. If I purchase a really expensive car, can I deduct the entire amount of state and local sales taxes paid on the vehicle?

A. No, only state and local sales taxes paid on up to $49,500 of the purchase price of a qualifying vehicle are deductible.

Q. Does the purchase of a used car qualify for this deduction?

A. No. In order to take the deduction, you must be the first owner of the vehicle.

Q. When can the vehicle be purchased to qualify for this deduction?

A. This deduction applies to vehicles purchased after Feb. 16, 2009 and before Jan. 1, 2010.

Q. Do I have to itemize in order to take this deduction?

A. No. Anyone who qualifies can take this deduction. You will claim this deduction when filing your 2009 federal income tax return in 2010. There will be a line on the 2009 tax forms, just follow the instructions.

Q. Are there any restrictions on who can take the deduction?

A. Yes. This deduction is phased out for higher income taxpayers. Single taxpayers whose modified adjusted gross income is less than $125,000 and married taxpayers whose modified adjusted gross income is less than $250,000 will receive the full deduction.

Q. If I purchased a qualified vehicle, may I amend my 2008 tax return to claim the deduction now?

A. No. You can only claim this deduction on your 2009 tax return.