Taxpayers are always looking for extra items to deduct on their income tax returns. One of the most common items most everyone owns is a motor vehicle. Every state requires motor vehicle owners to have license-plate tabs renewed each year. Taxes are included with the basic renewal fee for the tabs. The Internal Revenue Service (IRS) allows for license-tab taxes to be deductible if they meet a three-part test.
Ad Valorem Tax
The first IRS test for determining if a license-tab tax is deductible is whether the fee is an ad valorem tax and therefore based on a percentage of value of a property. Currently, 12 states impose an ad valorem tax, which means they impose tab fees based on the value of the motor vehicle. Motor vehicle owners with higher-value vehicles pay larger tab fees, which brings in more money to the state. These ad valorem states include Alabama, California, Kansas and Minnesota. Taxpayers in the 12 states can deduct license-tab tax.
The second test by the IRS is whether the license-tab tax is imposed on an annual basis. It does not have to be collected annually. It can be collected semi-annually or even every other year. Most states send yearly reminders imposing a deadline to pay the taxes. The tab taxes can then be renewed at the local licensing branch, online or by mail. The payment process includes verifying current legal driver's license numbers and making the payment. If the license-tab tax is imposed annually, taxpayers can deduct it.
The third and final test is whether the license-tab tax has been imposed on personal property. Personal property includes equipment, clothing and cars. The IRS states that this test is met even though the tab tax is established for an individual to drive his car legally on the road or to use a car legally on the road.
Some states impose additional excise taxes in coordination with standard license-tab taxes. These excise taxes can be deductible if they are based on value. For example, in 2006, the city of Seattle imposed an additional excise tax to fund the monorail project. This was an additional 1.4 percent tax included in the license-tab tax. Taxpayers could deduct this amount from their 1040 income tax returns because it met the IRS test for value.