Many people overlook possible tax deductions when they file their income tax returns. One of the many deductions that people miss is the sales tax that was paid on a new or used car.
This is a tricky deduction, however. You can claim sales tax paid or state income tax withheld, but not both on your income tax return. This deduction is not as beneficial in high income tax states like California and New York.
Although, if you are fortunate enough to live in one of the seven states that do not charge their residents a state income tax, this deduction is a must have!
States that do not charge a state income tax like Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. The rest of the states are pretty close in their income tax withholding, so your tax savings will vary.
You must itemize your deductions in order to claim the sales tax you paid on your car purchase. If you file using only the standard deduction, you cannot claim the sales tax deduction. In order to claim the deductions, two things must be present:
• You itemize your deductions
• Your sales tax paid exceeds your state income tax withheld
You must also be able to produce a sales tax paid receipt to the IRS if you are audited. Make sure that you have all necessary paperwork to prove that amount and keep it in a safe place. Normally, you are not notified of an IRS audit until three years after you have filed your tax return.
Furthermore, if you have purchased a car in the past, and want to adjust your previously filed income tax return, you may do so for up to three years after the filed date.
Don’t forget to claim the EV Tax credit as well if you have an electric car.
How Do I Know Which Deduction is the Best Choice?
The best tool to use to determine if you can use the sales tax deduction is at the IRS where they have a deduction calendar. There is a series of questions that the system will ask of you to determine your eligibility to claim your sales tax rather than your income tax due.
It will take you approximately ten minutes to complete the survey. Before visiting the site, you will want to have the following items available to you:
* W2 form for the tax year you are working on
* Sales receipts showing sales tax paid for motor vehicle, boat, aircraft, or home
* Previous residential addresses for selected tax year
As always, if you are unsure, you should seek a tax professional for advice.
Remember that even though you can’t write off the entire purchase of a new vehicle, you can still deduct sales tax and other car related expenses (like fuel/gas).
Small Business Car Deduction (section 179 Depreciation)
Small business owners can also take advantage of Section 179 in the U.S. tax code, which allows them to immediately deduct the full purchase price of qualifying equipment and software, including vehicles, up to a certain inflation adjusted dollar limit ($25,000 in 2022).
This provision helps businesses save money on their taxes by allowing them to write off the entire cost of the equipment in the year it was purchased, instead of depreciating it over several years.
This can be useful for S-Corps and Sole Proprietors where any gross income is passed through to their personal taxes. So taking a larger tax deduction can offset their personal tax liability.
To qualify for the Section 179 deduction, the vehicle must be used for business purposes more than 50% of the time. As a small business owner, gig worker, or self-employed person, you’d use Form 4562 to report your Section 179 deductions.