Car Loan Interest

It's a fair question: when looking for a used car bargain, buyers may often want to know whether car loan interest is tax-deductible. As with many things involving the Internal Revenue Service, there is not a straight yes or no answer to this question.

The Internal Revenue Service and financial experts have provided some categories for tax-deductible interest including the following: mortgage or home equity payments, student loan payments, business loan payments, and payments for specific types of personal loans. Many accounting experts agree that an auto loan is not inherently tax-deductible on an individual's federal tax return.

Prospective car buyers looking for a way to make auto loan payment interest tax-deductible have to find a way to fit it into one of the categories above. One of the most common ways to do this is to detail the auto line as a business expense. When doing this, the usual standards apply: the driver should think carefully about what constitutes a business expense, and whether the use of this vehicle applies to a business use category.

Another way to place a loan into a tax-deductible category is to use a home equity loan or HELOC ( home equity line of credit) to finance the purchase of a vehicle. Because mortgage and home equity loan interest is included in a tax-deductible category, this is a popular way to place an auto loan under the "umbrella" of what is considered to be deductible.

However, there is a downside to pursuing a home-equity-based approach to an auto loan. Someone who is borrowing for an auto loan should know that in the case of securing the loan with home equity, the property will be the first asset on the firing line in the case of nonpayment. Without this in mind,a borrower can fall prey to replacing the simple repossession of the vehicle with a liability involving their primary investment: the home.

Although financial experts will tell you that these are the main options for making auto loan interest payments tax-deductible, there are many rumors circulating about new rules under a US tax stimulus plan that would change Internal Revenue Service regulations to make auto loan interest payments tax-deductible to also make tax-deductible the amounts paid in auto sales tax upon purchasing a vehicle. The reasoning behind this, according to many of those reporting on the situation, is that the large auto companies which are now under considerable distress need customers in order to make themselves viable again. Recent economic events have shown how interdependent American businesses are, and how government and business can work together to minimize economic damage in a down market. With that in mind, auto buyers can anticipate potential relief from new government legislation that may help those without property assets deducted auto loan interest payments from their income tax returns.