Every year, tax season allows most Americans to reflect on the significant life changes and purchases they’ve made in the past year. Getting married, having a child, and buying a house all carry particular weight during tax season, as they may offer rebates to the individual or family filing.
While less significant than, say, the birth of a child, purchasing a car is still a major financial expenditure that supports economic growth, an outcome usually rewarded by the IRS in some form. Therefore, it is fair to wonder if your newly purchased vehicle provides a rebate on your annual return. In short, it does, but only in specific scenarios. Read on to learn more.
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Is Buying a Car Tax Deductible?
While you generally can’t write off the total cost of a new vehicle, you can deduct expenses such as sales tax. If you bought a new or used car this year, the amount you paid in sales tax shows on the purchase order notarizing your tax, title, and licensing fees.
Your state and city can both charge sales tax. For example, the Illinois vehicle sales tax is 7.25%, plus 1.25% for residents of Chicago. These combined taxes mean the sales tax on your car might be higher than your state’s general sales tax. If so, you can only deduct an amount equal to the general tax rate. In Illinois, the general sales tax is 6.25%, so in that state, the most you could deduct is 6.25% of the car’s cost.
A few states, Alaska, Delaware, New Hampshire, Oregon, and Montana, don’t charge sales tax for auto purchases.
Tax Deductions for Personal Vehicles
If you plan to write off costs associated with your car, ensure it meets the IRS guidelines for a personal vehicle. Your auto is considered a personal vehicle if:
- The vehicle weighs less than 6,000 pounds.
- It is not an ambulance, hearse, or combination ambulance-hearse.
- You use the vehicle for business 50% of the time or more.
- You finance the vehicle and use it for business before December 31.
Section 179 of the IRS code lets business owners write off the cost of equipment, including vehicles. Previously, you’d have to factor in depreciation or write off a portion of the asset’s cost each year. The new tax code allows business owners and self-employed people to write off the entire cost of the equipment in every tax year.
You can also deduct a percentage of a car’s cost if it’s used for business. The exact amount you can deduct depends on what percentage of the time the vehicle is used for commercial uses. Therefore, if you use your car vehicle for work 60% of the time, you can deduct 60% of the cost. Keep in mind that Section 179 caps the first-year write-off for a car at $18,200.
States With No Car Sales Tax
The income tax deduction is your only option if you live in a state with no sales tax. If you live in a state with no sales tax, the income tax deduction is your only option.
When doing their income tax, most individuals must choose whether to deduct the sales tax they paid or to itemize and add auto taxes to other kinds of sales, income, and property taxes. You can’t do both, so taxpayers must run the numbers in tax preparation software to determine which deduction is significant.
Property Taxes
Some states charge annual property taxes on vehicles. This is called the ad valorem tax, and it’s based on the value of movable property, like boats or cars.
You can deduct this tax and other state and local taxes, like income and real estate taxes. The IRS caps this deduction at $10,000 for all taxes. The limit is $5,000 per tax return for married taxpayers filing individually.
How To Deduct Sales Tax and Property Tax
Use Schedule A (Form 1040) on your federal tax return to claim the deduction for personal property taxes. This requires you to keep receipts of all expenditures for the year.
You can itemize or take a standard deduction, but you can’t do both. If the standard deduction is higher than the total of your itemized deductions, it’s not worth it to itemize. The 2022 standard deductions are:
- $12,950 for single returns and married individuals filing separately
- $19,400 for heads of households
- $$25,900 for married couples
Deduct Car Mileage
If you use your car for business, you can also deduct operating expenses. This year, taxpayers can use two rates to write off miles driven for business. From January 1 to June 30, 2022, the rate was 58.5 cents per mile. On July 1, the IRS increased its standard mileage rate to 62.5 cents per mile to reflect rising gas costs.
Using your car for charity earns a rate of 14 cents per mile. Track your mileage for business or charitable purposes, so you can deduct it when you do your taxes.
Deduct Car Depreciation
Depreciation allows you to claim deductions for wear and tear over multiple years. Depreciating your vehicle is helpful because it reduces your taxable income. There are several ways to calculate depreciation, and the IRS allows you to deduct a declining amount for five years. Only the business use of your car is eligible for a deduction.
There are three ways to calculate depreciation and multiple variables to consider. For details on depreciation and mileage rates, see IRS Publication 463.
Tax Deductions for Business Vehicles
Tax deductions for vehicles cover only the mileage related to business use, including:
- Driving from one job to another
- Going to a client meeting
- Travel from home to a worksite that is not your regular place of business
- Travel for tasks related to your business, such as making a bank deposit or purchasing supplies.
- Earning income using the car, such as a Lyft or Uber driver.
Remember that commuting to your office is never deductible, and you should never attempt to claim as you may be audited as a result.
Can You Write off a Car as a Business Expense?
Most people use their cars for both business and personal use. But you can only take tax deductions on the portion of costs related to business use. For example, if you drove 10,000 miles a year and 6,000 miles for business, 60% of your expenses are deductible.
Tax Credits for Electric Vehicles
Electric vehicles (EVs) and plug-in hybrid vehicles (PHEVs) produce far less pollution than conventional vehicles. EVs produce no tailpipe emissions, and hybrids don’t when in all-electric mode. For years, electric or hybrid plug-in vehicles were eligible for a federal income tax credit of up to $7,500. Taxpayers could also benefit from state or local incentives.
The passage of the Inflation Reduction Act in 2022 changed the rules. Only cars assembled in North America qualify for the full tax incentive. Specific used car models earn a tax credit of up to $4,000. If you are buying a new car this year, review vehicle eligibility requirements and lists of qualifying vehicles.
Effective January 1, 2023, other rules set price caps on eligible vehicles and qualifying household income. If you’re considering buying an electric vehicle, review tax credits for electric cars and decide if it’s best to buy this year or wait until 2023.