Is Buying a Car Tax Deductible?
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Buying a car for personal or business use may have tax-deductible benefits. The IRS allows taxpayers to deduct either local and state sales taxes or local and state income taxes, but not both. If you use your vehicle for business, charity, medical or moving expenses, you could deduct the costs of operating it. Some vehicles even come with federal and/or state tax credits. If you’ve ever asked “is buying a car tax deductible?” here are the answers.
Is buying a car tax deductible? Car sales tax
You may be able to deduct the car sales tax you paid when you bought a new or used vehicle from a dealer or private seller. The amount owed in car sales tax will be clear on the purchase order that’ll state your TT&L (tax, title and licensing) fees.
Both states and local governments can charge sales tax. For example, the California car sales tax is 7.25%; of that, 1.25 percentage points go to local governments. Local governments can, however, charge more on top of that state rate. So, if your municipality charges an additional 0.50 percentage points, your California car sales tax would be 7.75%.
Alaska’s municipalities might impose their own local sales tax, while the other states highlighted in the map charge neither state nor local sales tax. You can check your state’s car sales tax in our best state to buy a car roundup.
Sales tax vs. income tax
To pay Uncle Sam the least amount of money, you’ll want to deduct whichever is larger: sales tax or income tax. You can only deduct one.
- If your state doesn’t charge sales tax, like those listed above, or doesn’t charge income tax, like Texas, the decision is a no-brainer
- If your state charges both, you may need to play with the numbers
Tax preparation programs like TurboTax, which allows taxpayers to file federal returns for free, may be able to help you.
Limitations: The IRS only allows you to deduct up to $10,000 total in sales tax ($5,000 total if married filing separately). Note that “total” really means total, and includes any income and property tax deductions.
How to deduct sales tax
- Itemize. This method requires that you keep receipts or photos of receipts of everything you buy for the year, then add up the sales tax to account for deductions. To do this, you would use the IRS’ Schedule A (Form 1040).
- Take the standard sales tax deduction, plus big-ticket items. Rather than meticulously keeping receipts, you could use the IRS sales tax deduction calculator to estimate what your standard sales tax deduction would be based on your income, family size and ZIP code. It allows you to add the sales tax you paid for big-ticket items — such as a car, recreational vehicle (RV), boat or house — to get an estimate.
IRS sales tax calculator example
Using the IRS calculator, we input that a family of four living in San Antonio bought a new car in 2019, paying $1,200 in sales tax.
The family makes at least $50,000 but less than $60,000 annually, and wants to take the standard sales tax deduction, plus account for what they paid on the car. The calculator states the general sales tax paid on specified items is $1,116 — if you add the $1,200 sales tax on the car, the family might get a $2,316 federal tax deduction.
The IRS provides three categories to define specified items:
- A motor vehicle, including a car, motorcycle, motor home, RV, SUV, truck, van or off-road vehicle
- An aircraft or boat
- A home, including a mobile home or prefabricated home, or substantial additions or renovations to a home
Service members: You can still use the IRS sales tax calculator if you’re in the military. The calculator includes overseas U.S. military zones and districts.
Is buying a car tax deductible? Car operation expenses
Buying a car, according to the IRS, is generally a capital expense that can be deducted over time. You could ultimately deduct more money because you may be able to deduct the costs of operating the vehicle, not just the cost of the sales tax. There are two main ways of doing this.
Deduct car mileage
The IRS offers a list of standard mileage deduction rates for taxpayers who drive for business, charity, medical or moving expenses.
The rate depends on the purpose. For example, if you drove 5,000 miles for business in 2019, you could claim 58 cents a mile, which comes out to a $2,900 deduction. If you drove 500 miles for charity, you could claim 14 cents a mile, which comes out to $70.
Deduct car depreciation
There are three ways to calculate car depreciation deductions. The first is the “actual expense method,” which uses straight-line depreciation. The other two ways are more logarithmic, which could help small business owners by allowing for a larger car tax deduction earlier.
The details can get pretty extensive, so you could read about deducting car expenses in IRS Publication 463. If you have any questions, ask an IRS customer service agent or seek a tax professional.
Deducting personal vs. business use
If you drive the same vehicle for business and personal use, you can only take advantage of tax deductions on the cost of its business use.
You’ll need to keep track of how many miles you drive for business specifically and base your tax deduction on the mileage rate. The IRS offers more details on the business use of a car.
Limitations: The IRS limits the total amount of credit per vehicle to $7,500. If you owe Uncle Sam less than the amount of the tax credit, the difference disappears. For example, if your tax credit is $7,500 but you owe $6,000 when you file taxes, you don’t get a check for the difference — $1,500 — nor does it apply to your taxes for next year.
FAQ: Car tax deductions
What documentation do I need to prove the sales tax I paid?
Keep the purchase order and/or finance contract when you buy a car so you have the right documentation to account for how much you paid. If you’ve lost that paperwork, call your lender and ask for a copy. The selling dealership may or may not keep a copy as well.
Do I need different sales tax documentation if I lease a car?
Whether you lease or buy a car, you pay the same in sales tax, so in both cases a purchase order works. The lease contract would also suffice.
Could I deduct car tax credits?
Yes, certain cars come with federal and/or state tax credits, especially plug-in electric vehicles. Note that the federal electric vehicle tax credits available for Tesla vehicles expired at the end of December 2019.
What type of vehicle operation expenses could I deduct?
Besides mileage and depreciation, you may be able to deduct the following costs: gas, oil, tolls, insurance, parking fees, garage rent, registration fees, repairs, tires and car lease payments.
Is buying a car for tax deductions worth it?
If you’re after a quick tax credit, you might want to look at something like solar panels rather than a vehicle. But if you do need a car, it probably won’t hurt to get one with a large tax credit attached. Of course, there are many different factors to consider. Here are 14 questions to ask when buying a car.