Can You Claim a New Car on Your Taxes?

Purchasing a new car involves significant financial planning, and many individuals wonder about the tax implications. While the full purchase price of a new vehicle is generally not deductible, various tax benefits and deductions may apply under specific circumstances. These opportunities primarily relate to how the vehicle is used, certain vehicle types, or taxes and interest paid. This article will clarify the possibilities for claiming car-related costs or benefits on your taxes.

Deducting Car Expenses for Business Use

Businesses and self-employed individuals can deduct expenses related to a vehicle used for trade or business activities. To qualify, the vehicle must be used primarily for business purposes, such as client visits, deliveries, or travel between business locations. The Internal Revenue Service (IRS) offers two main methods for calculating these deductions.

The first method is the standard mileage rate, which simplifies the deduction process. For 2024, the standard mileage rate for business use is 67 cents per mile. This rate covers all operating costs, including depreciation, maintenance, and fuel, but taxpayers can still deduct parking fees and tolls separately. Keeping a detailed log of business miles driven is essential for substantiating this deduction.

Alternatively, taxpayers can use the actual expenses method, which involves tracking all costs associated with operating the vehicle. This includes expenses such as gasoline, oil, repairs, insurance, vehicle registration fees, and depreciation. This method generally requires more meticulous record-keeping, as receipts for all expenditures must be maintained. For business vehicles, a significant portion of the vehicle’s cost can be recovered through depreciation deductions over its useful life.

Accelerated depreciation methods, such as Section 179 deduction and bonus depreciation, can offer substantial first-year deductions for new vehicle purchases used for business. For tax years beginning in 2024, the maximum Section 179 expense deduction is $1,220,000, with a phase-out threshold starting at $3,050,000 in qualifying property placed in service. This deduction allows businesses to expense the full purchase price of qualifying equipment, including certain vehicles, up to the annual limit, rather than depreciating it over several years. Additionally, for 2024, bonus depreciation allows businesses to deduct 60% of the cost of eligible new and used property in the first year it is placed in service, a rate that is phasing down in subsequent years.

For self-employed individuals, business vehicle expenses are typically reported on Schedule C, Profit or Loss from Business, filed with Form 1040. Employees generally cannot deduct unreimbursed employee business expenses, including car expenses, unless they fall into specific categories like Armed Forces reservists or qualified performing artists, and would use Form 2106. Maintaining detailed records, such as mileage logs and receipts, is necessary to support any claimed deductions.

Understanding Limited Personal Use Deductions

Personal car use expenses are generally not deductible for tax purposes. However, there are very specific and limited exceptions where certain personal vehicle expenses can be claimed. These exceptions typically involve mileage driven for medical appointments, charitable activities, or, in highly restricted cases, moving purposes.

Mileage driven for medical appointments, treatments, or other healthcare services can be deducted. For 2024, the IRS allows a deduction of 21 cents per mile for medical travel. This deduction applies to miles driven to and from medical care, but it does not cover general maintenance or insurance costs. The total unreimbursed medical expenses must exceed 7.5% of your adjusted gross income to be deductible.

Similarly, mileage incurred while volunteering for a qualified charitable organization is also deductible. The rate for charitable mileage is set by statute and remains unchanged at 14 cents per mile for 2024. This deduction applies to travel directly related to the volunteer work, such as driving to a soup kitchen or transporting supplies for a charity event. Parking fees and tolls incurred during these charitable drives are also deductible.

Moving expenses, including vehicle use, are highly restricted and generally not deductible for most taxpayers. The primary exception applies to active-duty military members who are moving due to a permanent change of station. For these qualified individuals, the mileage rate for moving purposes is 21 cents per mile for 2024.

Claiming New Vehicle Tax Credits

Tax credits directly reduce the amount of tax owed, dollar for dollar, making them more valuable than deductions. The New Clean Vehicle Credit is a significant tax incentive for individuals purchasing eligible new clean vehicles. The maximum credit amount available is $7,500.

Eligibility for this credit depends on meeting specific criteria for both the vehicle and the buyer. The vehicle must be a new clean vehicle, such as an electric vehicle (EV), plug-in hybrid electric vehicle (PHEV), or fuel cell vehicle (FCV). Key vehicle requirements include a manufacturer’s suggested retail price (MSRP) limit of $80,000 for vans, sport utility vehicles, and pickup trucks, and $55,000 for other vehicles. The vehicle must also have a battery capacity of at least 7 kilowatt-hours and undergo final assembly in North America. Additionally, the vehicle must meet critical mineral and battery component sourcing requirements, with specific percentages of materials and components needing to originate from the U.S. or free trade agreement countries.

Buyer eligibility for the New Clean Vehicle Credit is based on modified adjusted gross income (MAGI) limits. For new clean vehicle purchases, the buyer’s MAGI for either the current or prior tax year must not exceed $300,000 for joint filers, $225,000 for heads of household, or $150,000 for all other filers. To claim the credit, buyers must obtain a seller report from the dealer, which provides necessary information about the vehicle’s qualifications. The credit is then reported on Form 8936, Clean Vehicle Credits, and attached to the tax return.

Starting in 2024, buyers have the option to transfer the credit to the dealer at the time of purchase. This means the buyer can receive an immediate reduction in the vehicle’s purchase price equal to the credit amount, rather than waiting to claim it when filing their tax return. Dealers are responsible for submitting the necessary information to the IRS to confirm vehicle eligibility and credit amount for this point-of-sale transfer.

Deducting Car-Related Taxes and Interest

When purchasing a new car, some taxes and, in very limited instances, loan interest may offer tax benefits. The sales tax paid on a new vehicle can be deductible, but only if the taxpayer chooses to itemize deductions on Schedule A of Form 1040. Taxpayers must elect to deduct state and local sales taxes instead of state and local income taxes. This choice is typically beneficial for individuals who paid more in sales tax than income tax, or who live in states without an income tax.

The deduction for state and local taxes (SALT), including sales tax, is subject to a cap. For most taxpayers, the total amount of state and local taxes that can be deducted is limited to $10,000. This cap applies to property taxes, state and local income taxes, and sales taxes combined. For tax years beginning in 2025, the SALT deduction cap is set to increase to $40,000 for single filers and married couples filing jointly, and $20,000 for married couples filing separately.

Interest paid on a personal car loan is generally not deductible. This contrasts with mortgage interest, which can be deductible for home loans. There are rare exceptions where car loan interest might become deductible. For instance, if the vehicle is used as collateral for a home equity loan, the interest might be deductible as home equity interest. If the car is primarily used for business purposes, then the interest paid on the car loan can be considered a business expense and deducted as part of the actual expenses method.