Year End Tax Breaks on Car Buying

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Did you know that you can save money on your state and federal taxes when you buy a new or used car? It's true. If you use your vehicle for charity or business purposes, you can get a savings when you do your annual taxes. You can also deduct operating costs. Some vehicles such as hybrid and all-electric vehicles even offer state and federal rebates and tax credits. Sound interesting? Here's the scoop.

Vehicle Tax Deductions

When you purchase a new or used car from a dealer or a private seller, you may be able to deduct the sales tax you paid for the vehicle. Look at the purchase order for the vehicle to find the tax, title, and licensing fees. Various states charge different percentages for sales tax and local governments can charge on top of that. A few states such as Oregon and Montana charge neither local nor state sales tax on cars.
Some states charge personal property tax on top of sales tax on vehicles based on the car's value. These fees are charged to you every year. The Internal Revenue Service (IRS) allows you to deduct up to $10,000 in property tax. You can't write off the total purchase of a new vehicle, but you can deduct a portion of the cost from your gross income. Lots of people use their vehicle for business purposes and if you do, you may be able to deduct operating expenses on top of taxes to get a bigger deduction. The IRS lists standard mileage deduction rates when you use your car for business travel or when you have a major move or when you use your car for charity.
Obviously, if you use your car for both personal and business use, you can only take tax deductions on the miles and depreciation that you travel for business use. You'll have to track the number of business miles you travel. You can also deduct the depreciation on your vehicle. To find out how to do this, visit regarding car expenses.
Year End Savings
IRS Section 179 allows for the deduction of business vehicles as a business expense. To qualify, your car must:
  • Weigh under 6,000 pounds
  • Used for business purposes 50 percent of the time
  • Must be financed and purchased before December 31st (So, if you are thinking about tax savings for this year's taxes, buy before the end of the year.)
Keep in mind that if you use your car for business more than for personal transportation, the tax benefit is even greater. For instance, if you use your vehicle for work 80 percent of the time, you can deduct 80 percent of the cost. Use IRS Form 4562 to report Section 179 deductions. You can write off the entire purchase price of the vehicle as an equipment purchase for your company in the year you buy it, just like office furniture or computers. However, there is a cap for cars of $10,100 under Section 179. You can also write off the vehicle sales tax using Schedule C on your IRS form. Write the amount of sales tax you paid on line 23.
The Bottom Line
Tax laws change every year, so if you are thinking about purchasing a vehicle before the end of the year so you can save on this year's tax return, consult your tax professional first to see how it will play out for you. Discuss your options and laws regarding sales tax deductions, tax credit incentives, operating cost deductions and more. You might be surprised at how much you can save at tax time.