It’s that time of year again, and everyone is eagerly awaiting their tax refunds. While you’re waiting, read on to find answers to common questions people have about car buying and taxes.
Can You Deduct Sales Tax on a Car Purchase From Your Taxes?
One of the most common questions is whether you can deduct the sales tax of a car you buy from your taxes. The good news is there may be tax benefits to car purchases depending on your circumstances. The IRS allows taxpayers to deduct sales taxes from their state or local income taxes.
However, they’ve only made it possible to deduct them from one type of tax at a time. So, if you’ve paid state and local sales taxes, only one of them would qualify. Also, you can deduct a certain amount per mile when you use your car for business purposes. Some states have tax credits to incentivize the purchase of certain vehicles, too.
How Are Taxes Calculated for a Vehicle Purchase
Whether you’re buying from a dealer or a private seller, any sales taxes paid may be deductible. Check your tax, title, and licensing fees to see how much was charged on your purchase. It should be clearly listed on the purchase order if you buy from a dealer.
States and municipalities can both charge taxes on auto sales. In some areas, you have to pay both of them on a single purchase. California’s sales tax is 7.5% on the purchase of all vehicles. Of this, 1.25% goes to county governments. The governments of districts and cities can collect up to 2.5% more.
Only a handful of states have gone against the grain and avoided taxing car sales. Alaska, Delaware, Montana, New Hampshire, and Oregon don’t tax auto sales yet.
How Much of an Auto Sale’s Taxes Are Deductible?
The sales tax would be $1,000 if you bought a $20,000 car and paid a 5% sales tax rate. Now, let’s say your state had a general sales tax rate of 3%. If that were the case, you could subtract $600 from your local income taxes. That’s because you’re limited by the state’s general sales tax rate.
Should You Deduct Auto Taxes From State Income or Sales Taxes?
Some states don’t charge a sales tax on automobile purchases, like those listed above. If you live in one of them, subtract everything from your state income taxes. Not everyone has a clear-cut tax situation like this, though.
If you live somewhere without a state income tax, deduct everything from your state sales tax. Most places without an income tax charge a sales tax. Places that have both taxes are a little more complicated. Consider getting some tax software to calculate what you can deduct. Advice from an accountant could also be helpful.
Can You Deduct Property Taxes From an Auto Sale?
A few states charge property taxes on auto sales in addition to other taxes. Deducting them from your taxes is possible as long as they’re charged annually. But the IRS has a limit of $10,000 for property taxes combined with state and local income taxes or sales taxes. The IRS limits drop down to $5,000 when you file singly.
How Do Electric Vehicle Credits Work for Federal Taxes?
Have you wanted to buy a used electric vehicle, but shuddered at the cost? The federal government provides tax credits on qualifying electric vehicle purchases. That’s on top of anything given to you by the state or local governments.
As of 2022, the federal credit has a maximum limit of $7,500. So, you can deduct up to that amount from your federal income taxes after buying an electric car. But, it must qualify for the tax credit first. Your deduction can’t exceed what you’ve paid in taxes already, either.
Can You Deduct Your Car’s Operating Expenses?
The IRS allows deductions if you use your vehicle for business or charity purposes. The amount varies depending on the purpose. For example, every business mile qualifies for a 56-cent deduction on returns for 2021 and a 58.5-cent deduction when you file for the 2022 tax year. If you drive for a charitable organization, you can deduct 14 cents a mile on your returns for both years.
Some small-business owners may deduct auto depreciation, too. This is more involved than just deducting mileage, so consult a tax professional to get the full picture.
How Does Deducting Auto Sales Taxes Work?
To deduct car sales tax from your tax bill, you must itemize deductions on your return. To use this method, you must keep track of every receipt given to you all year. Download the IRS’ Schedule A Form 1040, and use it to document everything. You’ll enter the car purchase’s info where it mentions state and local property taxes. The Sales Tax Deduction Calculator on the IRS website, www.irs.gov, can help you figure out the amount you’re allowed to deduct.
What’s the Maximum Amount You Can Deduct for Auto Sales Taxes?
If you file your return as an individual, even if you’ve spent more, the IRS only allows up to a combined total deduction of $10,000 for state and local income, sales, and property taxes. The cap is $5,000 if you’re married and filing separately.
Which States Have the Lowest Auto Sales Tax Rates?
Since each state sets its own taxes, rates vary depending on the location. Buying a car somewhere with low rates could save you quite a bit of money, too. You have to pay an 8.25% rate when buying a vehicle in Nevada, for example. By going to Alabama, you could drop that down to 2%. You’d save $825 by buying a $10,000 car, compared to doing it in Nevada.
Keep in mind, though, that if you buy a car in another state, you’ll still need to pay sales tax to your home state because that’s where you’ll register the vehicle.
What Is an Excise Tax, and Why Is It Charged on Your Car Purchase?
Certain places have something called an excise tax. Earlier, we discussed how personal property taxes apply to some auto sales. Excise tax is another name for the same concept.
This is calculated using the car’s fair market value as determined by relevant authorities. For example, when determining a car’s value, Fairfax County, VA uses the J.D. Power National Automobile Dealers’ Association Official Car Guide. They’ve set a 4.57% tax rate for most vehicles. So, you’d pay $457 on a $10,000 car.
How Can You Tell Which Taxes Are Relevant to Your Purchase?
Since many taxes are set locally, it’s not always easy to know which ones you’ll have to pay. We’d recommend starting at the local Department of Revenue. If you go on their websites, most of them list which taxes apply locally. Sometimes, the DMV’s website has everything listed on it, too. If you’re buying something out of state, look at that state’s site.
Remember that tax rates vary from one state to another. Following this guide will give you the information you need to begin the process of deciding whether your car qualifies under the current laws.
