The luxury car tax expires next year

If you're thinking of buying an expensive car in the next couple of months, it might pay to postpone the purchase.  That's because the 3% luxury tax on cars is scheduled to expire after December 31, 2002.

The luxury tax was originally introduced in 1990 as a 10% excise tax on cars costing over $30,000.  It has been phasing out ever since.  The tax, currently 3% of the purchase price that exceeds $40,000, ends after 2002.  It's possible, but extremely unlikely, that Congress could choose to extend it.

If you decide you can't wait until 2003 to buy, you can at least use the tax as leverage when you're negotiating price.  Ask the dealer why you should pay more now when you could wait until January and avoid the tax.  Chances are he'll be willing to make some price concession to close the sale immediately.

If you're buying a vehicle for business use, it might not pay to postpone the purchase.  Be aware of a new tax break for luxury vehicles.  You can now deduct up to $4,600 of extra first-year depreciation.  For this purpose, a luxury vehicle is one costing more than $15,500.  If you use the car for both work and pleasure, you can deduct only the business portion.  The tax benefit of the 2002 depreciation deduction may outweigh the cost of the luxury tax.