Is Buying a Car Tax Deductible?
Tax deductions can help reduce an individual’s income, thereby reducing the amount of taxes they owe. There are many different deductions, but business owners or those who are self-employed may benefit from these deductions more than individuals.
Is buying a car tax deductible? For businesses, a vehicle used for work might offer a few deductions. For individuals, though, deductions related to an automobile are not so plentiful. For cars relegated to personal use, individuals can’t deduct the cost of the vehicle.
Here’s what individuals need to know about deductions related to a vehicle, including when they can be applied and when they simply are not applicable.
Can Individuals Deduct Any Auto Expenses?
When filing taxes there are individual deductions and there are business deductions. These are separate from each other. An individual who is a business owner or a self-employed individual can deduct some car expenses as business expenses.
For personal deductions, many tax filers take what’s known as the ‘standard deduction.’ This is an allotted deduction that varies for single individuals, those who are married, or a head of household. Filers also can claim dependents.
Filers who claim the standard deduction, though, cannot take any further deductions for personal expenses. However, if the filer doesn’t claim the standard deduction, they can choose to itemize individual expenses for healthcare costs, mortgage interest, etc.
Some filers may find that their itemized expenses are far greater than the allotted standard deductions. For these filers, it might make more sense to itemize.
Those who itemize also can elect to deduct either their state/local sales taxes paid during the year or their state/local income taxes paid during the year. However, filers can only deduct one or the other—not both types of taxes. There also are applicable deduction thresholds.
There are categories of some employees (like government workers, reserve military, etc.) who could be eligible for auto deductions that aren’t reimbursed. Per the IRS: “…certain taxpayers may still deduct unreimbursed employee travel expenses, this includes Armed Forces reservists, qualified performing artists, and fee-based state or local government officials.”
Tax Deductions for Businesses
Auto expenses for businesses, however, could be deductible. The Internal Revenue Service outlines the auto expenses that are tax-deductible for businesses. There are two ways–per the IRS–to deduct auto expenses:
- Standard mileage rate
- Actual expenses
Both methods require that business owners or those who are self-employed keep records and receipts. What if a business leases its vehicles? According to the IRS, businesses “…must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate.”
The IRS also notes that expenses like tolls or parking also can be deducted separately. In addition, there are stipulations about who can take the standard mileage rate.
Taxes can get complicated, and business owners or self-employed individuals should consult a tax professional or a certified public accountant to review what auto expenses are deductible and which ones are not.
Donating a Vehicle
Individuals who itemize their deductions also could benefit from their vehicle in another way: a charitable donation. If an individual donated their vehicle to a reputable charity, the donation could be a tax deduction.
Typically, the charity would provide the individual with documentation related to the sale of the vehicle at auction. This documentation can be provided to a tax professional when filing taxes. Owners can deduct the amount of the car’s auction price, but Intuit explains they can’t deduct the fair market value of their car unless the vehicle was given to a family at a discounted price or if the charity uses the vehicle for its use,
If the car is auctioned for less than $500, Intuit notes that an individual can deduct either $500 or the fair market value (whatever amount is less).
Electric Vehicles Could Represent a Credit
While individuals might not have many auto deductions, they could claim a tax credit for an electric automobile. Tax credit helps offset the amount of tax due, and this credit could significantly reduce an individual’s tax.
The credit for electric vehicles is typically noted on dealership sites as $7,500. However, the credit phases out after so many models are sold. For example, many Tesla models no longer qualify for a credit. Some vehicles only qualify for a portion of the credit.
Before an individual starts looking at a new electric car under the belief that the new purchase will be a great tax credit, they might need to research if the credit even pertains to the brand or model. They could be sorely disappointed.
Watch Out for Tax Scams!
While individuals may want a large refund, a refund is never a guarantee. In fact, tax preparers who make grand promises related to refunds before they even see any paperwork should be avoided. Every year the IRS warns of tax scams to help consumers be on the lookout.
A ghost preparer, for example, will refuse to sign a tax return as the preparer. If a preparer won’t sign, filers need to beware. Per the IRS: “Not signing a return is a red flag that the paid preparer may be looking to make a quick profit by promising a big refund or charging fees based on the size of the refund.”
Scammers also might target individuals via email. The IRS explains that the phishing scheme tries to lure individuals into clicking a link that purports to be a tax transcript. Don’t click on any unsolicited files. In addition, filers should receive a notice in the mail if something is amiss with their return.
Another popular scheme is one that has frightened many innocent victims. The scammer will call under the guise of the IRS and threaten that the police are on their way to arrest the individual for unpaid tax debt. Individuals with any tax issues should typically receive written communication (like a bill) from the IRS via mail.
Phone scammers also threaten to cancel an individual’s social security number. Individuals shouldn’t fall prey to this scam. For phone calls that are tax scams, individuals should write down the phone number and hang up. Individuals can report the spam caller to [email protected].
Not Sure What to Deduct?
For some filers, deciding whether or not to take the standard deduction or itemize individual deductions could be confusing. When filers are confused about the best way to proceed with their taxes, they might want to consult a professional tax preparer.
Taking a deduction or a tax credit for which an individual doesn’t qualify could result in an audit, fines, or worse. Tax season can be daunting, and the Tax Code isn’t the easiest to decipher. When in doubt, it’s best for fillers to consult a professional.
When it comes to deducting auto expenses, though, many filers might just be without many options. Those who don’t own a business or who are not self-employed could deduct state/local sales tax if they itemize their deductions (and don’t deduct income tax).
Business owners or self-employed individuals, though, could have more options for vehicle-related deductions. In addition, individuals could claim credits related to the purchase of electric vehicles, but, for some cars, the credit has already been phased out. Regardless of what deductions and credits are being claimed, all filers need to follow any stipulations and qualifications imposed by the IRS.