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Car credit
Car credit
Jacquie L. Sawh, 27, is a mom and a food critic for Idahoeats.com.
Question: "Does the stimulus bill include a new vehicle tax credit? If so how does it work? As I understand it, you get a tax credit equal to the amount of sales tax you pay. I live in a state that does not have sales tax, so what benefit do I get from buying a new car? Also, does the vehicle need to be a new model - i.e. a 2009 - or can it be a 2008?" - Jacquie L. Sawh, Portland, Ore.

Expert: CNNMoney.com auto and Detroit reporter Peter Valdes-Dapena

Answer: It includes a tax deduction, not a tax credit. Tax credits are dollar-for-dollar reductions on your tax liability, while tax deductions allow you to reduce your taxable income, and therefore lower the amount of taxes you pay.

You will be able to deduct the amount of the sales or excise tax on a new car from your income before calculating your taxes. This will be an "above the line" deduction, so you will be able claim the amount even if you don't otherwise itemize your deductions, just as you do with payments to a 401(k) plan or IRA, for instance.

Since it's a deduction, the amount of the benefit depends on your overall income and how much tax you usually pay. Typical savings will range from about $300 to $600, according to estimates put together by the office of Sen. Barbara Mikulski, co-sponsor of the original bill.

While the benefit applies to the purchase of any new car - one not previously owned by anyone else, whether it's a 2008 or 2009 model - the deduction only applies to sales tax on the amount of the purchase, up $49,500. If you spend more, only the sales tax on that amount is deductible. It also applies only to families making less than $250,000 a year or individuals making less than $125,000.

You can't deduct sales tax if you don't pay it, of course. So car buyers in states without a sales tax get no benefit. But they do save a lot more money by not paying sales tax.

According to estimates by auto-sales trackers at R.L. Polk, the plan is expected to generate about 96,000 sales this year, an increase of about 0.1% from the 10.7 million sales Polk had previously expected.

NEXT: Infrastructure spending
Last updated February 24 2009: 6:58 AM ET
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