[frazwood]

In December 2009, my wife and I purchased a new car that the dealer told us would qualify as a tax deduction.

So, in April 2010, we filed our 2009 taxes and claimed this on Schedule A as part of our various deductions. In June 2010, we received a letter from the IRS stating that "We have disallowed the amount claimed as itemized deduction for new vehicle taxes on Schedule A, Itemized Deductions, filed with your tax return because you are not allowed to claim both state and local general sales taxes and new motor vehicle taxes for tax year 2009". I think this was a mistake (we didn't claim state and local general sales taxes), but I didn't dispute it.

Now, I am working on my 2010 taxes and it seems like I can still claim this tax deduction (even though the car was purchased in 2009) as long as I don't claim general sales taxes (i.e. check box 5b). I do claim income taxes (i.e. I check box 5a).

Will there be an issue given that I attempted to claim this deduction last year?

[ebaines]

You can take the deduction on your 2010 tax return only if you actually paid the sales tax in 2010. See the instructions for line 7 of schedule A:

You may be able to deduct state and local sales and excise taxes (or certain other taxes or fees in a state without a sales tax) paid in 2010 for the purchase of any new motor vehicle(s) after February 16, 2009, and before January 1, 2010. To figure the amount you can deduct, you will need to complete the Worksheet for Line 7 on the back of Schedule A.

So your proposal won't work, since you paid the sales tax on the car in 2009, not 2010. What you should do is dispute the IRS finding regarding your 2009 tax filing. Are you sure you checked box 5a (and not 5b) on your 2009 schedule A?

[frazwood]

Thanks for the clarification. I missed the part about paying the sales tax in 2010 for a car purchased in 2009.

Yes, I am certain that I checked box 5a and not box 5b. I didn't catch this mistake until just now. Is it too late to dispute with the IRS? How would I do that?

[ebaines]

Is it too late to dispute with the IRS? How would I do that?

On the letter they sent you there should be instructions omn what to do if you want to dispute their findings. I usually involves returning a section of their letter with your indication that you are disputing it, and you inlcude supporting documentation to make your case. I would suggest you include a letter in which you describe that you deducted state income taxes, not state sales taxes, and therefore are entitled to the new car sales tax deduction. Include a copy of your schedule A and a copy of the car invoice showing the sales tax amount so it's really clear.