Can You Claim a Financed Car on Your Taxes?

Navigating tax deductions for significant assets like a car can be challenging. A common query arises when a car is financed: can the financed car be claimed on taxes? The answer depends on the car’s use and the specific expenses incurred.

General Principles of Car Tax Deductions

A car acquired for personal use is generally a personal asset, and its purchase price is not deductible. This principle applies whether the car is bought outright or financed through a loan. The Internal Revenue Service (IRS) distinguishes between personal use and qualified uses, such as business, medical, or charitable purposes, when determining deductibility.

Commuting to and from a regular place of employment is considered personal use and is not deductible. Deductions are tied to the purpose of the travel or the nature of the expense, not merely the existence of the vehicle or its financing.

The Role of Financing in Car Deductions

Financing impacts tax deductions concerning the principal and interest components of the loan. Principal payments on a car loan are never tax-deductible, regardless of how the vehicle is used, because they represent a return of borrowed funds.

Car loan interest for vehicles used solely for personal reasons is generally not deductible. Historically, certain personal interest deductions were eliminated by tax law changes. However, a new provision effective for 2025 through 2028 allows individuals to deduct interest paid on a loan used to purchase a qualified personal-use vehicle, up to $10,000 annually.

This deduction applies to loans originated after December 31, 2024, for new vehicles primarily for personal use, and the vehicle must have undergone final assembly in the United States. This deduction phases out for taxpayers with modified adjusted gross income over $100,000 for individuals and $200,000 for joint filers.

For business use, car loan interest may be deductible. If a vehicle is used for business, the portion of the interest corresponding to its business use can be deducted. This applies primarily to self-employed individuals and business owners, as employees generally cannot claim this deduction. For example, if a car is used 40% for business, then 40% of the interest paid on the loan may be deductible.

Common Deductible Car Expenses and Scenarios

Beyond interest, other car-related expenses can be deducted when the vehicle is used for specific qualifying purposes. For business use, taxpayers have two primary methods: the standard mileage rate or the actual expense method. The standard mileage rate for business use is 67 cents per mile for 2024 and 70 cents per mile for 2025. This rate covers the costs of operating a vehicle, including depreciation, maintenance, repairs, gas, oil, insurance, and registration fees.

If choosing the standard mileage rate, parking fees and tolls incurred for business purposes can still be deducted separately. Alternatively, taxpayers can deduct actual expenses, which include costs like gas, oil, repairs, tires, insurance, registration fees, and depreciation. If using the actual expense method, car loan interest is also included among the deductible expenses, proportional to the business use. For both methods, careful records of business miles and expenses are essential.

Mileage for medical and charitable purposes may also be deductible. For 2024 and 2025, the medical mileage rate is 21 cents per mile. This deduction applies to transportation for medical care, including doctor visits, hospital trips, and pharmacy runs for prescribed medicines. The charitable mileage rate for both 2024 and 2025 is 14 cents per mile. This rate applies to miles driven while volunteering for a qualified charitable organization.

State and local sales tax paid on the purchase of a car may be deductible if the taxpayer itemizes deductions, subject to the overall state and local tax (SALT) deduction limit. Personal property taxes assessed annually on a vehicle, if applicable in the taxpayer’s jurisdiction, are also generally deductible as an itemized deduction.

Preparing to Claim Car-Related Deductions

Meticulous record-keeping is essential for substantiating any car-related tax deductions. For business use, this includes maintaining a detailed log of all trips, noting the date, destination, business purpose, and odometer readings at the start and end of each trip. Receipts for all actual expenses, such as fuel, maintenance, and insurance, should be retained.

Taxpayers must decide between using the standard mileage rate or the actual expense method for business use. If the standard mileage rate is chosen in the first year a car is used for business, a taxpayer can switch to the actual expense method in later years. However, if the actual expense method is chosen initially, it must be continued for the car’s entire service life. This choice can significantly impact the deductible amount, so comparing potential deductions under both methods is advisable.

To claim most car-related deductions, such as medical mileage, charitable mileage, and sales or personal property taxes, taxpayers need to itemize deductions on Schedule A of Form 1040. If the standard deduction provides a greater benefit than itemizing, these specific car-related deductions would not be utilized. Understanding whether itemizing is beneficial for one’s overall tax situation is an important preparatory step.

How to Report Car-Related Deductions

Reporting car-related deductions involves specific tax forms. For self-employed individuals and business owners, business-related car expenses, whether calculated using the standard mileage rate or actual expenses, are typically reported on Schedule C (Form 1040), Profit or Loss From Business. This schedule is where income and expenses from a sole proprietorship are detailed.

Medical transportation expenses and charitable mileage deductions are reported as itemized deductions on Schedule A (Form 1040), Itemized Deductions. These are grouped with other medical or charitable contributions, respectively. State and local sales taxes paid on a car and personal property taxes on a vehicle, if applicable, are also reported on Schedule A under the state and local taxes section.

In certain limited situations, such as for qualified performing artists or fee-basis government officials, unreimbursed employee business expenses, including car expenses, might be reported on Form 2106, Employee Business Expenses. However, for most employees, unreimbursed work-related expenses are no longer deductible due to changes from the Tax Cuts and Jobs Act. For complex situations or significant deductions, consulting with a tax professional can help ensure accurate reporting and compliance with tax laws.