California is one of the highest-taxed states in the country. And part of the reason why people pay so much is the sales tax, which averages 8.68 percent, and personal income taxes, which currently stand top out at 13.3 percent. Therefore, in order to reduce your California tax liability, it makes sense to deduct as many expenses are possible when buying a vehicle. And that includes vehicle registration fees, whenever possible.
Are Vehicle Registration Fees Tax-Deductible in 2021?
Your vehicle registration fees are tax-deductible in 2021 both at the federal and state levels. However, you must fulfill some conditions.
For starters, you must itemize your deductions. If you claim the standard deduction, you cannot deduct your vehicle registration fees. Also, you can only deduct the set amount that is based on your annual vehicle value. When calculating federal taxes, you must use the actual expenses method of deduction, which depends on the cost of operating a car based on the portion that is used for business.
One thing you need to know when making the license fee tax deduction in California is VLF. The California VLF, or vehicle licensing fee, is set by California’s Department of Motor Vehicles (DMV). It represents that portion of your car’s registration fee that is tax-deductible.
It would be best if you used the available online vehicle license fee calculator to obtain an estimate of the deductions you can take within your tax return. To be on the safe side, use the DMV registration fee calculators instead of other tools that may be available online.
However, you need to ensure you choose the right kind of calculator, depending on what kind you are purchasing and where you purchase it from. For example, if you purchased a vehicle outside California, you need to use the new resident fees calculator to estimate the fees you would pay. On the other hand, if you purchase a second-hand car in the state, you should use the used car calculator to estimate your fees.
How to Deduct a Vehicle Registration Fee in California
To find your vehicle licensing fee amount, consider looking at your billing notice from California’s DMV. It may have come through your physical mail or via email. Check each line item until you find the vehicle license fee or the value-based portion, as that is the registration fee you can deduct from your tax return directly. You can also find the value in your validated registration card.
Note down your license number. You will need it when calculating your VLF online.
Find out your vehicle identification number (VIN). The latter is a unique code given to each car at the time of manufacture. You will need the alphanumeric serial number when using the California registration fee calculator online. Typically, it consists of 17 digits, but they may be fewer, depending on when the car was manufactured. VINs are usually found on the dashboard or side door pillar on the driver’s side, but the number may also be found in the internal part of the engine or hood of the car.
Note down your residential address, including your county, city and zip code.
Gather all other relevant pieces of information you may need concerning your vehicle, such as the make and model, fuel consumption types, the market value and when you first operated or purchased the car.
Search for the relevant DMV online calculator and input the information asked for. The standard VLF calculator only requires your license number, VIN and the tax year.
If you need to determine other types of information, such as renewal fees or registration of a car bought elsewhere, you will need to factor in additional variables before determining your registration fees. And then, determine the portion that is based on the value of your car to determine VLF. You can also do that by dividing your vehicle’s weight by 250 and subtracting the result from the registration fees for newer vehicles.
You can also calculate the VLF using the car’s market value. For vehicles registered on or after 5/19/09, the VLF is 1.15 percent of the car’s market value. Anything registered before that will attract a VLF of 0.65 percent of the market value of the vehicle.
Depending on whether you are deducting your vehicle registration fees as a business or individual expense, you can complete Schedule C or Schedule A and attach it to Form 1040. The latter is meant for itemizing personal expenses, while the former is meant for business expenses.
- Business owners who use the actual expense method of calculating their car usage deduction can deduct the percentage of the entire vehicle registration bill that corresponds to percentage of business use. For example, if you use your vehicle only for business -- that is 100 percent for business -- you can deduct the entire amount of your registration bill on Schedule C of your tax return, according to IRS Enrolled Agent John Moore. If, on the other hand, only 50 percent of vehicle usage is business-related, you can deduct 50 percent of the total registration bill amount.
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