The IRS has numerous legal regulations that could decrease the tax burdens associated with buying and maintaining a vehicle. Each layer of financial and legal red tape involved has a potential bearing on the amount of taxes owed, both at the point of transaction and over the course of the vehicle's history. The quick answer for those wondering, "Does buying a car help with taxes?" is yes, it potentially does.
For those in the know, there are actually quite a few scenarios where the IRS allows a tax deduction for buying a car. Read on for a brief overview of when and how these tax benefits apply.
Tax Deductions for Buying a Car
While most already know business expenses can be deducted, many are surprised to learn that, in certain US municipalities, even just buying a car does help with taxes, including for personal use. Various tax deductions related to sales tax, property tax, and even direct credits for certain types of vehicles are available. The IRS' exact calculations can be complicated, but the basic principles are easy to understand.
Within limits, sales tax can be deducted on new or used vehicles, whether obtained from a dealer or a private seller. Look for the tax listed in your purchasing order, usually listed under TT&L (tax, title, and licensing) fees. Depending on the relevant local taxing authority where the vehicle was purchased, this figure itself may need to be broken down. For instance, federal/state municipalities with general sales tax rates only allow the deduction of the general sales tax, not the car sales tax rate, even if the latter is more.
First, however, compare the potential tax benefits of combined local/state sales taxes vs. local/state income taxes because the IRS only grants one or the other. For most personal uses, the question becomes: which option will provide the greatest tax savings?
Some states also charge a "personal property" tax based on a vehicle's value. This can also be included in a vehicle deduction — but only if their property tax is charged annually (check with your local jurisdiction). For combined property and sales tax deductions, the IRS grants a maximum vehicle deduction of $10,000 for taxpayers and households (i.e., married couples and their dependents).
Vehicle deductions are filed in one of two ways:
- The IRS' Form 1040 Schedule A
- The IRS deduction calculator for sales taxes
Business Tax Deductions for Buying a Car
The IRS also gives business tax deductions for buying a car or vehicle on top of the sales and property tax breaks discussed above. For legal purposes, the term "business" includes charity, medical, and moving expenses. Deductions are offered as mileage deduction rates, which vary according to use (e.g., business trips might be 56 cents per mile, while charity deductions might be 14 cents per mile).
If a vehicle is used for legally defined business purposes in any US municipality or territory, the vehicle's operational expenses and estimated depreciation can be deducted. Doing so requires careful determination of what constitutes personal or business use.
How to Determine Personal vs. Business Use
Keep careful records of when a vehicle is used for business purposes exclusively. Almost all the total value and operational expenses can be deducted for vehicles reserved solely for business use. Business deductions can usually be made with standard mileage rates or actual expenses.
Depending on the deduction method used, deductions may include:
- Gas
- Tolls
- Insurance
- Parking costs
- Registration fees
- Repairs
- Tires
Be sure to keep track of all expenses to prove the operational expenses claimed.
If a vehicle is used for both business and personal use, you must keep accurate records of expenses related to each independently. Business vehicle deductions may conflict with other deductions. Study the legal limitations and requirements related to business tax deductions, and compare them to any other business/personal deductions you might claim.
Considerations When Buying a Car for Tax Purposes
As of early 2023, the IRS' total allowable tax credit is $7,500 per vehicle — but if you owe less than the tax credits are worth, the IRS doesn't pay you for the difference or roll them into the next year. Before purchasing a vehicle, be sure which tax deductions you (or your business or estate) might qualify for.
Compare them all, and consider which ones will benefit you the most. Also, consider how they might conflict with or reduce each other, and seek competent legal or financial services for advice. Also, ask the dealer about tax credits for electric and hybrid vehicles.
Consider Oak Motors for Your Next Car Purchase to Optimize Tax Savings
Oak Motors specializes in buy here, pay here financing designed to save you money, build credit, and maximize tax deductions. While we strongly advise consulting with your tax accountant or legal counsel, we can clarify which tax credits may be available to you in Indiana.
If you're looking for reliable pre-owned vehicles with industry-leading warranties, stop by one of our Indianapolis and tri-state-area locations — and if you have more questions about how buying a car could help with taxes, call Oak Motors today.
Categories: Buying Information