How to Get the Biggest Car Tax Deduction

February 24, 2012

A car purchased in the current tax year may qualify you for more car tax deduction types than you realize. Learn which car tax deductions are available.

IRS Tax Form

If you purchase a new vehicle, one of the most exciting things to uncover is how to get the biggest car tax deduction. There's always a welcome way of saving a few extra dollars to help offset the high price paid for a new vehicle. If you own a small business, there are many deductions that you may qualify for, and even some of those hidden fees (or taxes you might not even think about at the time of purchase) may be deductible. So, here is a list of some common taxes or fees that are overlooked when searching for deductions.

Registration and Titling Taxes
States charge an annual fee to renew the registration or license plate stickers on all vehicles - even those used for business purposes. Sometimes, these fees can run as much as several hundred dollars per year. If you use your vehicle exclusively for business purposes, you'll be able to deduct all of these hidden taxes on your federal income tax return.

Emissions or Smog Test Fees
Many states now require car owners to prove that their vehicles are roadworthy and that they don't cause too much pollution in the way of carbon-based missions. State required smog or emissions tests can cost a lot of money. If you need to make repairs to your vehicle in order to pass these tests, the repair bills can also be quite expensive. Fortunately, you can write these costs off on your federal income tax return if you're a business owner and your vehicle is used in the operation of your business.

State Sales Tax on Cars
Whether you buy a new or used vehicle during the course of a tax year, you will probably pay a lot of State sales tax at the time of purchase. Depending on how much sales tax you paid on the vehicle, it is quite possible that your small business will wind up paying more in state sales taxes than it does state income tax. Since the IRS allows you to choose between deducting either state income tax payments or state sales tax payments, your new or used car purchase could be a large deduction on your federal tax return.

Tax Preparation Fees
When it's time to visit your accountant or tax professional to help you with your business income tax return, don't forget to deduct the mileage for the trip to their office. If you are the kind of entrepreneur that prefers to take the do it yourself approach to income tax preparation, you can also deduct the amount paid for using an online application such as TurboTax or H&R Block's online tax preparation service.

Car Insurance Premiums
If you use your vehicle exclusively for business purposes, then it may make you feel better to know that even that high first payment on your insurance premiums is tax deductible. While individual taxpayers are not able to claim insurance premiums as a deduction on their federal income tax returns, small business owners can - as long as the vehicle is used in the day to day operation of the business.

Price Comparison: New Car Deduction Tax vs. Used Car Deduction Tax

According to the economic stimulus package (2009), car buyers shopping for a new vehicle are eligible for car deduction tax for any vehicle that was purchased after February 17, 2009. This allowed taxpayers to get a refund when filing their 2009 tax returns. Although there are certain terms and conditions that governed this stimulus package, it helped to boost new car sales in the US automotive market. In order to find out if it's better to avail of a new car tax deduction or purchase a used car for less, you need to compare facts and figures and do your research well.

Car Tax Deduction Policy
This policy is applicable to all new vehicles that were purchased on and after February 17, 2009 and before January 1, 2010. As per the Act, all new vehicles that were purchased during this period qualified for deductions on state and local sales taxes, and excise taxes. Motor vehicles that qualified for this tax deduction included passenger automobiles, motor homes, light trucks and motorcycles with a gross vehicle weight of 8,500 lbs. or less. Vehicles with a purchase price of up to $49,500 could qualify for the tax deduction. Since the Act covered only new vehicles, new car buyers could get a good deal on any new vehicle purchased (regardless of the model year), as long as the buyer was the vehicle's first owner. Although this car tax deduction policy was a very lucrative option, it did have certain limitations.

Important Considerations
The tax deduction could only be claimed on the 2009 tax returns. Moreover, the deduction did not benefit high income taxpayers whose modified adjusted gross income fell between $125,000 and $135,000 (for single taxpayers) and between $250,000 and $260,000 (for married taxpayers).

New Car Tax Deduction vs. Used Car Tax Deduction
The 2009 economic stimulus package wasn't applicable to any used car purchases. In addition, since every state has its own car sales tax rate, the deduction available to residents of each state varies. However, states that didn't have car sales tax were also eligible for the new car tax deduction policy. Since the tax deduction policy is extended to cars that don't fall under the hybrid category, it works out to be a big income tax deduction, particularly if your taxable income is high.

To cite an example of how you could benefit from a sales tax deduction, consider making a new car purchase of $25,000. If this vehicle has a trade in value of $14,000, most states would tax the difference between the new car price and the trade in value, which in this example amounts to $11,000. If the sales tax rate in your state is 6.5 percent, your deduction would amount to $715. Although this reduces an individual's taxable income, several car buyers prefer to purchase a used car at a much lesser price, since the new car value depreciates soon after it's driven off the car dealer's lot. In addition, many buyers may not be eligible for a new car auto loan given the current economic scenario.

However, buyers should look for a good quality used car that's been driven only a few years and obtain a vehicle history check to make sure that there aren't any title issues. Instead of taking advantage of the tax credit, buyers could purchase a used car and save on interest that would have been spent on the auto loan. Consumers could also obtain more information on tax refunds and incentives by visiting the IRS.

Two of the Biggest Car Tax Deduction Options

Used car tax deduction. While there is no specific used car tax deduction on the actual purchase of a used vehicle, you may be able to take advantage of certain taxes paid at the time of purchase. Tax laws change frequently, but for the last several years there has been a law that allows deduction of sales tax paid in your state. To take advantage of this deduction, you will need to itemize your expenses, a more complex process when filing taxes. In order to utilize this deduction, Schedule A must be filled out and you have the option of claiming either state and local income taxes or state and local sales taxes. You must have kept all receipts in order to add your sales tax figures properly. If you have purchased a used car and paid a significant amount of taxes, this may be a viable option. There are specific rules and limits that may apply to this procedure, so it's best to carefully read all instructions and consult the IRS directly or have a tax agency file your paperwork.

Donated car tax credit. Another option for receiving a car tax deduction is to donate your vehicle to charity. This option also, according to specific tax laws, has limits and criteria for filing the deduction. Times have changed since the law stated that you could claim the entire retail market value of the vehicle when donating to charity. At this point, you are eligible to deduct the amount which the charity receives for the sale of the vehicle, and you must attach a receipt from the charity as proof. This makes it a bit more difficult to get a fair deduction for the value of any donated vehicle, but you do have options here as well. Charities that plan to sell your vehicle at auction for any meager amount they can receive will not be the best choices for donation. Instead, you should seek out charities that plan to use your vehicle for specific charity purposes, or give the car directly to a family in need. In either of these cases, and since the vehicle will not be auctioned away for a very low price, you should be able to deduct the car's full market value. Of course, your return would be more substantial and beneficial to you if the used car you are donating has a high value or is in extremely good shape.

Newer Car and Truck Tax Deduction Options

Cash for Clunkers. The Cash for Clunkers program was a federally regulated system that existed for a period of time in the year 2009 in order to help to energize and revitalize the national economy. This program offered a rebate on vehicles that met certain standards for emissions criteria, if the owners agreed to have those vehicles taken and destroyed. By bringing in your fuel inefficient, highly polluting older vehicle to a sponsoring dealership, you could trade in the car for a brand new vehicle with a better gas mileage rating and better emissions standards. The government, in turn, agreed to pay you a rebate of several thousand dollars for the car you turned in.

Cash for Clunkers vehicles can be marked off as deductions on your tax return. There is a specific section in the federal tax forms you'll fill out that asks you to indicate whether you have purchased a vehicle through this nationwide program. If so, simply answer the questions regarding your taxes in the following section.

Fuel Efficient Vehicle Discount. Fuel efficiency is an important concern for many people at this point in time. This is because many older cars have been found to contribute greatly to pollution in the atmosphere in all parts of the world. Newer technology has provided us with the possibility of having for fuel efficient and lower polluting vehicles on the road. As an incentive to purchase these vehicles over the less efficient, higher polluting cars, the federal government has also sponsored a tax discount for cars that meet certain standards.

More information about the standards your car must qualify for to receive a discount can be found at your local dealership or at your DMV.

Cars and Trucks Purchased for Business
If you use your vehicle for business purposes, you can write off a percentage of the costs associated with the car based upon the percentage of time you spend using it for such purpose. You'll need to be prepared to provide receipts and other evidence of your having used the vehicle for business, in case you get audited.

Hybrid Car Tax Deduction: How to Save Money Now

Getting a hybrid car tax reduction is one of the many benefits of buying a hybrid car. The tax reduction is in the form of government rebates. It allows you to get money back on your hybrid car purchase. Hybrid cars are the wave of the future with their clean technologies. The government is seeing this and wants to help solve the global pollution issue. Having these cars on the road will reduce the emissions produced by cars by a great deal. These incentives are out there to clean up the roads and our atmosphere. Many people are taking advantage of these tax credits, and so should you. Hybrid cars cost a bit more than their non hybrid counterparts (if they have one). The price is increased due to the powerful electric battery needed and that can raise the cost of the car by thousands. However, with this tax credit, you can minimize the difference between the non hybrid and the hybrid model by getting this money back.

  1. Research. Many hybrid cars qualify for this new hybrid discount. Every car is different though when it comes to the amount back. The maximum credit available right now is around $3500 dollars, and the Mercury Milan is the model that gets that much off. Not surprisingly, the Prius is also up there at $3150 dollars back. There are many luxury hybrids listed on the list. Lexus has four models listed, Mercedes with three, and two for both Audi and BMW. These are expensive cars to begin with, so having that credit can be a big help when buying the higher end luxury cars. The thing you must realize if you are looking at charts on the Internet about these figures is that they are offered on a limited scale. After 60,000 of the manufacturer's models are used for credits, the dollar amount of your credit will reduce. For example, Honda credits are no longer available, while Ford has cut its credit amount in half twice. It will begin to be phased out very soon, so you have limited time to act. To get the maximum credit, you must buy now, or else you may see a reduced credit, or even no credit at all for buying your hybrid.
  2. Claim. Your credit is not given in the form of cash back right when you purchase the vehicle. Since it is a tax credit, you must claim the credit on your taxes, so you will get it back when you receive your refund check (if you get one). Remember that this tax credit is only for new cars that you purchase. If you are leasing a car, you are not entitled to the tax credit, but in fact, the leasing company you are using gets the credit.
  3. Enjoy the car. You have now received your credit, and you are all set to now enjoy your green car. Hybrids will help with the environmental issues of the world, and as a way of saying thanks, this tax credit can help you purchase your next (hybrid) car.

How to Get the Biggest Car Tax Deduction for Mileage

It's possible to get a tax deduction for car mileage if the vehicle is used for business purposes, charitable services, medical purposes and moving or relocating. Thus, if you drive your car to meet a client or attend a meeting, you can deduct the cost of driving your car for such business purposes, from the taxes you pay. This doesn't, however, mean that you can deduct the expense of commuting to work and back. Similarly, if you drive to get medical care for yourself or a member of your family, you can deduct the cost incurred, when filing your returns. You can also deduct the cost of driving a vehicle, to perform charitable services for your church or any other charity. Lastly, if you use your vehicle to move to a new residence that is at least 50 miles away from your old home, you may deduct the cost of driving the vehicle as a relocation deduction. If the vehicle is only used for business purposes, the complete cost of operating the vehicle can be deducted but if the vehicle is used for both personal and business purposes, only costs incurred for business use of the vehicle may be deducted. Remember, for reduced car mileage, tax cuts will also be reduced.

Keeping Car Mileage Tax Records

  • It's essential that you maintain records of car mileage and the expenses incurred in order to get the tax deduction.
  • Start noting the odometer reading from the date you start using your car for business purposes. Note the date, number of miles driven and the purpose for which the car was driven.
  • Also note the expenses incurred for each trip, be it expenses for driving the car or maintaining it. Note the date, the amount and the type of expense incurred. Also keep the receipts of all such expenses filed properly.
  • The expenses can include gasoline, oil change, parking fees, repairs, car insurance, toll fees and car registration fees.
  • You have to maintain records of any reimbursements related to car expenses you receive from your employer.
  • At the end of the year, calculate the business miles travelled in the year and the expenses incurred for business related purposes for the same duration. Also calculate your reimbursements received.
  • Use this information when you prepare your income tax returns and be careful to keep your records for at least three years before discarding them.
  • There are two methods to take advantage of a tax deduction. You can either reduce by 50 percent, the total expenses incurred for business related purposes or you can deduct 48 cents for each mile you travel on business.
  • The IRS also allows small engine tax credit and this can be used to your advantage if you have a hybrid car, electric car or any other vehicle with a small engine.

By keeping yourself informed, you can spend less on gasoline and car costs by recovering the same through tax deductions.

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