As the all-wise Ben Franklin once wrote, "in this world, nothing can be said to be certain, except death and taxes". Sadly, we can't escape taxes entirely, but a vehicle purchase is one way to get some Benjamin Franklins back from Uncle Sam. With tax day quickly approaching, you may be wondering how to deduct your recent car purchase. After all, taxes on a new vehicle can come out to thousands of dollars.
In our home state of Illinois, for example, vehicles are subject to a 7.25% state sales tax, plus 0.25% to 0.75% in county taxes. At an 8% tax rate, a $35,000 new car would set us back an additional $2,800. Luckily, deducting taxes on a large purchase like a vehicle is possible, and if you bought an electric vehicle, you could get an even bigger credit.
A Car Purchase Can Be Tax Deductible
According to Zacks, you can deduct sales tax for a new or used car no matter if you bought it from a dealership or a private seller. You can do this by itemizing the purchase on your IRS form (more on that later) just as you would for property taxes or state income tax.
If you claim a deduction for your car, you'll want to keep your purchase agreement in a safe location as proof that you bought the vehicle. Some states like Montana, Alaska, and Oregon don't charge any vehicle sales tax, while other states charge a higher than average tax rate for a vehicle.
The IRS allows taxpayers to deduct either local and state sales taxes or local and state income taxes, but not both. If you live in a state with no income tax (lucky you) then it will automatically work in your favor to deduct your sales tax, including for your vehicle purchase. If you're like us and live in a state with both income and sales tax, you'll need to crunch some numbers to see which route will yield the highest return.
Electric Vehicle Tax Credit
If you purchased an all-electric or plug-in hybrid in or after 2010, you can get up to $7,500 in tax credits. To qualify, a vehicle must meet certain standards. It must have a gross vehicle weight of no more than 14,000 lbs, and it must be propelled by an electric motor that draws electricity from a battery. This battery has to have a capacity of at least 4 kilowatt-hours and must be capable of being recharged from an external source of electricity.
To claim your tax credit, you must have purchased the vehicle new and put it into use during or after the launch of the program in 2010. The amount of credits you receive depends on the model. For example, buying a 2020-2021 Ford Escape Plug-in Hybrid will give you $6,843 in tax credits, while a 2018-2021 Honda Clarity Plug-in Hybrid gets you the full $7,500 credit. You can see if your electrified vehicle qualifies for a tax credit on the U.S. Department of Energy's fuel economy website at fueleconomy.gov.
How to Deduct Car Sales Tax
There are two ways to deduct sales tax according to Lendingtree. You can itemize, which means you'll keep receipts of each purchase, including your vehicle, and then add up the sales tax using IRS Schedule A (Form 1040).
You can also take the standard tax deduction which estimates your total deduction based on income, family size, and Zip code. If you choose this option, you'll be able to add big-ticket items like a car purchase (as well as a motorcycle, boat, or motorhome) to the estimate. The standard deduction can be done using the IRS Sales Tax Deduction Calculator.
It's important to note that there is a limit of $10,000 on the amount of sales tax you can claim from 2018 to 2025, says H&R Block. The $10,000 limit applies to the total amount a taxpayer can claim for real property taxes, personal property taxes, and state and local income taxes (or general sales tax if elected).