How to Reduce Taxes from Buying a Car

Ah, spring! A time of year when our thoughts turn to thaw out, blossoming new life, and…taxes. We’ll show you how to reduce your tax burden by buying a new (or new to you) vehicle.

How Much Tax Gets Added to the Purchase Price of a Car?

If you’ve been shopping for a car recently, you’ve probably experienced unprecedented sticker shock. But have you calculated how much tax you’re paying on your vehicle? You may want to sit down before you start crunching those numbers.

Sales Tax

You’ve heard (and seen) car advertisements with the disclaimer that the price listed “excludes taxes and registration.” So, what does that mean, exactly?

If you live in a state that collects sales tax, you’ll be charged, just like you would if you bought clothing or a computer.

In most states, even if you have a large down payment, you’ll be charged sales tax based on the full sales price of the vehicle.

You may also be subject to county and city sales tax. So, if your state sales tax is 6% and your county and/or city charges an additional 2%, you’re paying an effective rate of 8%. On a $40,000 vehicle, that’s an additional $3,200.

Registration

In addition to sales tax, you’re also obligated to pay a registration fee (your registration papers, plates, and tags). Like sales tax, the registration fee is determined by state and local regulations and is added to the cost of your vehicle. But it differs from sales tax in a couple of ways:

• You’re required to pay registration fees every 1-2 years
• You may pay a fixed amount every year, or the fee will be determined based on factors such as your vehicle’s age, weight, and fuel efficiency.

Good News! Some Car Expenses are Tax-Deductible

What are some ways your vehicle purchase can reduce your tax burden?

Business

If you use your car for business, you may be able to deduct the sales tax using schedule C on your business return. However, it may be more advantageous to deduct the amount you paid in state and local income taxes during the year. You can’t take both deductions, so you’ll have to choose one.

For business owners and self-employed people, IRS Section 179 now allows you to write off the entire purchase price of assets, including computers, furniture, and cars, in one tax year. Previously, you could only write off part of the expense over several years.

You may also be able to write off part of your loan interest based on the percentage that your vehicle is used for business (80% business = deducting 80% of the interest amount). You’ll include that with all of your other vehicle expenses for the year, such as gas, insurance, maintenance, and repairs.

You can deduct either your actual expenses or use the standard mileage rate set in the Internal Revenue Code.

Electric Vehicle Credits

Thinking about your carbon footprint? Buying an electric vehicle can save on taxes. Many models qualify for a federal tax credit of up to $7,500. Be sure to check with the manufacturer or your dealership about the fine print.

Donate Your Old Car

Dealerships are starting to offer less on trade-ins now that more vehicles are available. And selling your car privately can be a huge hassle.

You may get more value by donating your old car, especially if it needs repair. Many non-profit organizations will pick up the vehicle from your driveway. Some organizations will recondition the car to get more from the resale, which means you get a bigger tax deduction.

Save Taxes on Your Next Car

Before buying your next car, familiarize yourself with your state and local tax statutes. This will save you additional sticker shock when you see the tax bill. And since everyone’s tax situation is unique, you’re encouraged to consult with your tax preparer or an accountant. They’ll be up to date on the latest regulations that can help reduce your tax burden.

Whether you’re buying your next car for personal or business use, be sure to save and organize ALL of your receipts. This will make it easier to track the expenses and taxes you’ve paid and save you headaches when it’s time to file your tax returns.