Is Buying A Car A Tax Deduction?
Purchasing a vehicle is a large investment, so it is natural for taxpayers to be seeking any areas where they can save money, such as through tax credits and tax deductions.
With the knowledge that people often use their vehicles for both personal and business purposes, there are certain tax breaks that may help eligible individuals lower the cost of their car purchases.
TABLE OF CONTENTS
If I Bought A Car, Can I Claim It On My Taxes?
Personal Vehicles Tax Breaks
Car Sales Tax
Property Tax
Deducting Sales And Property Taxes For Vehicles
Business Vehicles Tax Breaks
Vehicle Purchase
Car Mileage
Car Depreciation
Electric Vehicle Tax Credits
Frequently Asked Questions
Can I Claim Car Sales Tax And State Income Tax?
Can I Claim Car Mileage On A Vehicle Used For Both Personal And Business Use?
How Do I Know How Much Sales Tax I Paid For My Car?
Key Takeaways:
- Taxpayers may be able to deduct $10,000 total in either local and state sales taxes or local and state income taxes – not both.
- Taxpayers who purchase vehicles that are utilized for business purposes, charity, medical, or moving expenses may be able to deduct vehicle purchase costs, car mileage costs, and car depreciation costs.
- If a vehicle is used for personal and business purposes, taxpayers can claim business deductions based on how often the car was used for business.
- The IRS offers a non-refundable electric vehicle tax credit of up to $7,500 for eligible purchases.
If I Bought A Car, Can I Claim It On My Taxes?
If you are purchasing or have recently purchased a vehicle, you can usually deduct some of the cost from your gross income when you file your taxes.
Certain circumstances allow taxpayers who purchase a car for personal or business use to deduct either local and state sales tax or local and state income tax when they file their income tax return.
Personal Vehicles Tax Breaks
Individual taxpayers are permitted to deduct $10,000 total in sales, income, and property taxes each year, and because taxpayers must choose between deducting sales or income taxes, it is in their best interest to compare their tax payments and deduct whichever amount is larger.
Car Sales Tax
If taxpayers purchase a new or used car, they may be able to deduct the amount they paid in car sales tax when filing their federal income tax returns. To find out how much they paid in sales tax, taxpayers can check their vehicle purchase order stating the tax, title, and licensing fees.
The amount of sales tax that can be deducted from a taxpayer’s tax return depends on their state and local government. Furthermore, people living in states without sales taxes, including Alaska, Delaware, Montana, New Hampshire, and Oregon, will have the option to write off income taxes as an itemized personal deduction.
Property Tax
Certain states charge personal property taxes on physical assets owned by taxpayers, including cars and vehicles. For property tax deductions, the vehicle must be taxed annually, with the amount depending on the value of the car.
Deducting Sales And Property Taxes For Vehicles
Taxpayers will benefit from exploring all of their vehicle tax-deductible options as there are different ways to make tax claims that can result in different tax savings. There are two main types of tax deductions, itemized and standardized, that result in different tax breaks.
Itemized Deductions
Itemizing deductions involve reporting individual expenses, along with copies of receipts, and deducting the total sales tax from each of these expenses using Schedule A IRS Form 1040, Itemized Deductions. In this situation, taxpayers can list the property taxes under the line that reads “state and local personal property taxes.”
Standardized Deductions
Claiming standard deductions is usually a simpler approach than itemized deductions, as taxpayers can claim the standard sales tax deduction rate based on their income, expenses, and location, instead of listing items individually and providing proof in the form of receipts.
Claiming standard deductions also allows taxpayers to add the sales taxes that were paid on their vehicles so they can accurately estimate their deductions.
Business Vehicles Tax Breaks
Unlike cars used for personal purposes, the IRS allows people with business vehicles to deduct certain operating expenses from their tax liabilities. This approach gives small business owners, freelancers, contractors, and other workers to achieve higher tax savings through a larger tax deduction.
Vehicle Purchase
Under Section 179, business owners and self-employed individuals can write off the purchase price of a qualifying vehicle in one tax year if the purchase meets the following qualifications:
- The vehicle weighs less than 6,000 pounds (excluding exceptions)
- The vehicle was financed and used for business before December 31
- The vehicle was used for business at least 50% of the time
There is a limit of $10,100 – $18,100 under Section 179.
Car Mileage
Taxpayers who use their vehicles to drive to their place of business, for charity, medical, or moving expenses may be able to claim standard deductions on their vehicles. The deduction rate depends on the purpose of driving.
Car Depreciation
As the value of a car depreciates, taxpayers who use their vehicle for business may be able to claim car depreciation deductions. The details regarding this type of deduction are outlined in IRS Publication 463.
Vehicle Operation Expenses
Business owners can sometimes deduct other related car costs from their tax returns, such as gas, insurance, registration fees, tolls, parking fees, tires, and repairs.
Electric Vehicles Tax Credits
As an incentive to encourage taxpayers to make environmentally-conscious choices in their consumerism, the IRS offers an electric vehicle tax credit of up to $7,500, on top of other potential state or local tax incentives, that can be applied when purchasing an eligible all-electric or plug-in hybrid vehicle.
This is a non-refundable type of tax credit, so any excess credit amount will be returned to the IRS, and will not be issued as a tax refund.
Frequently Asked Questions
Can I Claim Car Sales Tax And State Income Tax?
No, taxpayers must choose to either deduct car sales taxes or state income taxes from their tax returns – they cannot claim both.
Can I Claim Car Mileage On A Vehicle Used For Both Personal And Business Use?
It is common for people to drive the same vehicle for personal and business use, but when it comes to tax deductions, taxpayers can only claim deductions for car mileage used for business purposes. Therefore, they must meticulously track how many miles were driven for business purposes before applying the tax deduction rates.
How Do I Know How Much Sales Tax I Paid For My Car?
In order to determine how much sales tax was paid when purchasing a vehicle, taxpayers can refer to the finance contract or purchase order from when they bought the vehicle. The dealership will usually have a copy of this documentation as well, but it is beneficial to keep this copy with their tax records for easy access when they file their taxes.
If you have recently purchased or are considering purchasing a motor vehicle and are wondering what tax credits and tax deductions you may be eligible to claim and lower your income tax liability, the tax experts at Ideal Tax would be happy to guide you through the process.
Our experienced tax consultants are backed by a team of licensed tax attorneys, accountants, and IRS-enrolled agents who have assisted clients through car purchases across all 50 states. Schedule a free consultation today to learn about our tax relief process.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
