Is buying a car tax-deductible? Well, that’s an excellent question to ask when you are considering a vehicle purchase.
Public transportation is not always convenient, which is why about 91 percent of American households own at least one car. Unfortunately, where there is demand for a product, the price tends to rise, and that is why vehicles tend to be expensive to own.
A used car will cost you an average of about $28,000. On the other hand, a new car will cost you a whopping $47,000. Therefore, it makes sense to take advantage of car purchase tax deductions if they are available. That way, you will enjoy some tax relief when paying for something that is very essential for you.
Can You Deduct Sales Tax on a New Car?
You could deduct sales tax on a new car. This kind of tax is usually applied to goods for sale at the point of purchase. And as the consumer, you are responsible for paying them.
All but five U.S. states charge state sales taxes in some form. Therefore, if you do not buy a car in Alaska, Oregon, Delaware, New Hampshire and Montana, you could claim state sales tax deductions.
Current IRS rules state that you can deduct up to $5,000 in state and local income, property and sales taxes if you file as single and itemize. The limit is double that for couples filing joint returns. However, there are limitations that apply, so do take note of that.
If your car purchase expenses plus all other itemized expenses are less than the standard deduction, you are better off using the latter. For the tax year 2021, the standard deduction limits are $12,550 for singles, $18,800 for heads of households and $25,100 for couples filing joint tax returns.
When claiming sales tax deductions, you need to file Schedule A (Form 1040).
Tax Credit for Buying a Car
You may also qualify for tax credits when you purchase a vehicle. The Plug-In Electric Drive Vehicle Credit (IRC 30D) is available for eligible taxpayers who buy cars that draw propulsion energy from a battery with at least five kilowatt-hours of capacity. The car must have a gross weight of fewer than 14,000 pounds and have four wheels.
That said, a two- or three-wheel vehicle also qualifies if it draws energy from a battery with at least 2.5 kilowatt-hours and is rechargeable from an external source.
The tax credit typically ranges from $2,500 to $7,500 for four-wheel vehicles. For the other types of vehicles, the credit is 10 percent of the buying price up to a $2,500 limit.
However, you must have acquired your vehicle for use or lease to qualify for the credit. In addition, your car must have been acquired after December 31, 2009. Also, your vehicle must be used mostly in the United States.
To claim the tax Plug-In Electric Drive Vehicle Credit, you need to file Form 8936.
Deductions for Car Operations
If you are self-employed and use your vehicle entirely for business operations, you can deduct the expenses associated with operating and owning it entirely. However, if you also use it for personal purposes, you can only deduct the business-related expenses. Filing will be done in either Schedule C or Schedule F if you are a farmer.
It is critical that you keep all the expense records associated with the vehicle in question. And then, you can claim deductions for depreciation and actual expenses. Such expenses include parking and toll fees as well as maintenance costs.
There is also the option of claiming deductions based on the standard mileage rates, and this can apply for charity and medical moving alongside business travel. For the tax year 2021, the standard mileage rate is 56 cents per mile for business, 14 cents for charity and 16 cents for medical travel or moving (when ordered as an active-duty member of the Armed Forces).
When using a car for charity, you may deduct the cost of gas and oil, or you can use the standard mileage rates to deduct your expenses.
- Statista: Number of vehicles per household in the United States from 2001 to 2017
- Vehicle Remarketing: Average Used Vehicle List Price Tops Record $28,000
- Business Insider: The average new car now costs more than $47,000. Don't expect them to get much cheaper anytime soon.
- TaxFoundation.Org: State and Local Sales Tax Rates, 2021
- IRS.Gov: Topic No. 503 Deductible Taxes
- IRS.Gov: IRS provides tax inflation adjustments for tax year 2021
- IRS.Gov: Plug-In Electric Drive Vehicle Credit (IRC 30D)
- IRS.Gov: Plug-in Electric Drive Vehicle Credit at a Glance
- IRS.Gov: Standard Mileage Rates
- IRS.Gov: Publication 526 (2020), Charitable Contributions
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.