Car Tax Deductions for Personal Vehicle Purchases

Buying a car is typically the 2nd most expensive purchase anyone makes, next to buying a home. It’s a known fact that you can deduct your mortgage interest and property tax when you own a home. The question is, is there also a new car tax deduction for the purchase of a new or used car?

To potentially deduct the purchase price of a car, the car must be owned by your business and used for business purposes, or your personal car is used for business purposes (Uber drivers, delivery services, realtors, etc.).

Deducting Sales Tax

So what if you don’t own a business? Luckily the IRS allows you to claim the sales tax you paid on a new or used purchased or leased vehicle, but, if you live in a state with a state income tax, it probably isn't to your advantage to do so.Tweet: You can claim sales tax paid on a new or used car. To claim sales taxes on a vehicle or boat you need to meet two criteria. You must itemize deductions, and your sales tax deduction, including the sales tax on the vehicle must exceed your state income tax. The IRS also provides an easy sales tax deduction calculator to define the amount you can claim.

Realistically, in most states with a state income tax, the state income taxes would be higher than the state sales taxes, even with sales tax on a car added. If you claim the standard deduction, you cannot deduct sales taxes.

Car tax credits for personal vehicles you don't want to miss out on.

Car Tax Deductions for Hybrid or Electric Cars

Another way of getting a new car tax credit is to purchase a plug-in hybrid or an electric car. The IRS offers generous tax credits. Buyers of plug-in hybrids and electric cars benefit from a new car tax credit of $2,500 to $7,500, depending on the size of the battery in the car. On the low end of the spectrum, cars with 4 kWh battery packs will qualify for a $2,500 tax credit. The tax credit maxes out at $7,500 for cars with a 16 kWh battery pack, like the Chevy Volt. The credits were provided as part of the American Recovery and Reinvestment Act, otherwise known as the “stimulus bill”. The tax credit incentive begins phasing out after an automaker sells 200,000 vehicles that are eligible for the credit.

Your state may also offer a credit for the purchase of an electric car or plug-in hybrid vehicle. In order to be eligible for these credits you must act fast as many of them tend to expire in a short period due to low quotas set by state programs.

For Example, California under The Clean Vehicle Rebate Project (CVRP) offers rebates for the purchase or lease of qualified vehicles. The rebates offer up to $2,500 for light-duty zero emission and plug-in hybrid vehicles that the California Air Resources Board (ARB) has approved or certified. The rebates are available on a first-come, first-served basis to individuals, business owners, and government entities in California that purchase or lease new eligible vehicles. In periods when funding exceeds current budgets, waiting lists can form. For more information, including a list of eligible vehicles and other requirements, see the CVRP website.

Before you buy an electric car do your due diligence and do not accept the word of the dealer on the available credit. Check the IRS website to see that the make and car model you are interested in is still approved by the IRS and by your state tax credit program. If the car that you want is still eligible for the new car tax credit, act fast to claim the credit before it expires.

For more information, consult with your tax specialist on all the ins and outs of tax credits and ways you can minimize your tax liability.

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