Does Buying a Car Help with Taxes?

For many consumers, a new car is the second most expensive monthly payment behind the mortgage. While some are in the financial position to purchase a car outright, others need to finance the car through a lender to afford the purchase. Those payments often represent a dent in monthly income.

Experts recommend not exceeding 10 percent of take-home pay for a car payment. While this percentage is less than the taxes withheld from many paychecks, consumers might wonder if there is a way to offset their massive purchase. Does buying a car help with taxes?

Is There a Car Purchase Tax Deduction?

Many individuals and families are denoted as employees. This means that taxes are withheld from their paycheck, and when they file tax returns they may reap the most benefit from claiming the standard deduction on their tax return. However, individuals and families also could have numerous deductions that add up to more than the standard deduction and they may choose to itemize their deductions.

Others are not employees. Maybe they own a business or freelance and need to file taxes differently. They also may pay taxes quarterly, as independent contractors are responsible for their own tax payments.

Those who itemize deductions may wonder about deducting the costs associated with their vehicle. For the average filer, car expenses are not a tax deduction. Those who are self-employed or who operate/own a business may be able to deduct certain costs associated with their vehicle.

Before adding up the cost of car lease payments, gas and other expenses, though, individuals must understand what can and cannot be itemized as a deduction. Filing taxes can be complicated. There are many rules governed by the Tax Code, and the typical individual might not be well-versed in these legal guidelines.  

Not sure what can be itemized? The Internal Revenue Service includes all the details about who can deduct car expenses. In addition, a certified public accountant or tax professional also can help filers understand what expenses are tax deductible.

Tax Deductions for Donating a Car to Charity

There is another way that a car might represent a tax deduction. Many charities allow individuals to donate a car to benefit their mission. When an individual donates a car to a charity, the vehicle is sold at auction.

The majority of the proceeds help to benefit the charity. After the vehicle is sold, the individual will receive a letter stating the sale price of the vehicle. On their tax return, they may be able to deduct the sale price. However, this depends on whether or not the individual itemizes their deductions or just takes the standard deduction.

In addition, specific tax forms may need to be filed when the vehicle sale price is higher than $500. Again, a tax pro can assist filers to ensure that all forms are filed correctly.

Are there Tax Credits for Electric Car Purchases?

For business owners and individuals that invested in an electric car, they may be curious about potential tax credits for their environmental-friendly upgrade.

Electric vehicles that plug in and rely solely on battery power qualify for certain tax credits. The credit, however, phases out when 200,000 units are sold of a particular model. For example, many Tesla models no longer qualified for a credit after January 1, 2020.

Can individuals benefit from these energy-efficient vehicle tax credits? Homeowners, for example, can utilize tax credits if they invest in specific energy-efficient upgrades or improvements to their home. KBB explains that individuals can take a tax credit for their electric vehicle purchase, but, again, some models might not be applicable for the credit.

Tax credits also aren’t the same as a tax deduction. A tax credit can help offset the amount owed on taxes, though.

Retain Records and Receipts When Taking Tax Deductions

Those who purchased a vehicle for business use may be able to claim certain deductions and/or tax credits (for certain electric vehicles). When deducting expenses, most experts recommend retaining all receipts and records associated with applicable business expenses.

Place receipts and other documentation associated with deductions with the tax return. Business owners and self-employed individuals also may elect to scan all receipts and records and save them electronically.

Retaining all documentation associated with deductions is essential in case the individual is audited. Receipts can help provide proof of applicable costs from the vehicle.

How long do those records need to be saved? Most records need to be kept for a minimum of three years. However, the IRS advises businesses to retain documents longer in certain circumstances.

A Car is an Investment and an Ongoing Expense

Unless an individual is donating a vehicle to a charity and they itemize deductions on their return, there really isn’t any deduction that is applicable for individuals related to their vehicle. Again, if the individual takes the standard deduction on their return, even that charitable donation might not benefit them on tax day.

Vehicles can be both an investment and an expense for consumers. Ideally, the individual will pay off enough of the vehicle’s principle to gain equity in their purchase. This means that they could sell their car for a profit.

Buying a vehicle, though, is an ongoing expense. Vehicles require upkeep. New tires, mechanical repairs and weekly fuel costs all are part of the price of car ownership.

In today’s busy world, a car is a necessity in many cities. To ensure that the cost of owning a car does not become a financial blow to the budget, consumers need to understand how much they can feasibly spend both on the monthly payment and the costs to maintain their vehicle.

Experts recommend that car expenses should not exceed 20 percent of monthly take-home pay. The cost of transportation includes the monthly payment for the vehicle, plus all insurance, repairs and fuel expenses, too.

When a car begins to accrue more miles on the odometer, owners need to budget for other repairs. Some cars will need more upkeep than others. All cars will require frequent oil changes and tire rotations. Eventually, tires also will need to be replaced.

Use Carzing to Find the Most Affordable Vehicle

Find a car that fits the lifestyle and the budget. With Carzing, car buyers can find the perfect vehicle at home by using the site’s easy search query tool. Search by make/model, body type, price or just enter specific keywords to narrow down the car search.

Carzing will show all the options in the buyer’s area. Results can be refined by using the toolbar to the left of the results to select additional criteria like equipment, color and more. Buyers also can use the tool to refine results to only new models or just set parameters for price.

Car buyers also can use Carzing to get prequalified for financing. Buyers will need to enter their credit score and other data, and Carzing will show all the available financing options. Choose the best terms and monthly payments and print out the details to take to the dealership.

Carzing ensures that the buyer always remains in control. There is no sales pressure, and buyers can take as long as they need to find their vehicle. Knowing the car they want to buy and having all the financial details in hand ensures that the dealership visit can be much shorter and focused only on finalizing the deal and driving off the lot in the perfect car. Carzing is simple, accessible, and empowers the buyer to take control of their purchasing decisions!