You might be able to take the sting out of the cost of that new car you bought. Whether you buy a car for personal use or business, you may be able to take a tax deduction.
The IRS lets taxpayers deduct:
- Local and state sales taxes
- Local and state income taxes
You can only deduct one but not both. You can make your choice based upon which taxes are higher: sales tax or income tax. However, some states and municipalities don’t charge a sales tax.
If you use your vehicle for business, medical, moving expenses or charity, you can deduct your operating costs.
Car Sales Tax Deductions
You can deduct the car sales tax you paid when you bought your new or used vehicle. You’ll find this amount on the purchase order, which shows your tax, title and licensing fees. Sales tax can be charged at both the state and local levels, in which case you would combine them into a single sales tax total.
Sometimes car taxes are different than the general sales taxes. You are only allowed to deduct what you paid with the general tax rate.
States that do not have state or local car sales tax:
- New Hampshire
Deducting Sales Tax
To deduct a car’s sales tax, you have two options:
- Itemize – Hang onto all receipts if you are going to itemize your sales taxes on the IRS Schedule A (Form 1040
- Take the standard sales tax deduction – Your standard sales tax deduction is figured using your income, family size and ZIP code. You can even include any sales tax you paid on major items such as a car, RV, boat or house.
The IRS offers a Sales Tax Deduction Calculator to come up with an estimate for sales tax deductions.
Which is Better to Deduct: Sales or Income Tax?
If your state doesn’t charge a sales tax, income taxes are still available for deduction. Note that the IRS limits sales tax deductions to a total of $10,000, unless you are married filing separately, in which case both individuals would receive a $5,000 deduction limit.
Should you have a choice of deducting car sales tax or income tax, the best one to go with is generally the one with the higher deduction. Talk to a tax professional to help you make this decision.
Car Mileage Deduction
To help you get an estimate of a mileage deduction, the IRS has a table of optional standard mileage deductions for:
- Self-employed individuals
- Other taxpayers to determine deductible amounts for vehicles used for business, charity, medical purposes or moving expenses
Car Depreciation and More
There are a number of other deductions, including depreciation. The rules are very detailed, so review the IRS Publication 463 and talk to a tax professional. Note that the IRS claims buying a car is a capital expense, so it can be deducted overtime if you want.