Can You Deduct Taxes on a New Car?

Purchasing a new car involves various taxes. Whether a tax paid on a new vehicle is deductible depends on the type of tax, how the vehicle is used, and the taxpayer’s individual filing situation.

Deducting Sales Tax

Deducting sales tax paid on a new car is possible if taxpayers itemize deductions on Schedule A (Form 1040). Many find the standard deduction more advantageous, as it often provides a larger tax benefit. Itemizing depends on whether total eligible itemized deductions, including sales tax, mortgage interest, and charitable contributions, exceed the standard deduction amount.

The State and Local Tax (SALT) deduction cap limits the sales tax deduction. This cap limits total state and local taxes, including income, sales, and property tax, to $10,000 per household ($5,000 if married filing separately). This limit is temporarily increased for tax years 2025 through 2029. It can still restrict the total deduction for individuals in states with high state and local taxes.

Taxpayers choose between deducting state and local income taxes or sales taxes, but not both. This choice is relevant for new car purchases, as the sales tax on a significant purchase can be more beneficial than the income tax deduction, especially in states without an income tax. Sales tax paid on a new vehicle is added to any general sales tax deduction.

Two methods exist for calculating the sales tax deduction. One is to deduct the actual sales tax paid, requiring records and receipts. The second method uses IRS sales tax tables, which provide a general deduction based on income and family size. When using the tables, taxpayers can add actual sales tax paid on large purchases, like motor vehicles, to the table amount. The sales tax deduction is subject to the overall SALT cap.

Deducting Other Vehicle-Related Taxes

Beyond sales tax, other vehicle ownership taxes may be deductible for personal use. Some states and localities impose an annual personal property tax on vehicles, deductible as an itemized deduction on Schedule A (Form 1040). For this tax to be deductible, it must be based solely on the vehicle’s value and imposed yearly. If a portion is based on other factors, like weight or age, only the value-based portion is deductible. This deduction is subject to the overall SALT deduction limit.

Annual vehicle registration fees are generally not deductible, with an exception. If a portion of the fee is explicitly based on the vehicle’s value, that specific portion may be deductible as a personal property tax. Taxpayers should examine registration statements or consult their state’s motor vehicle department to determine if a value-based component exists. If identified, a deductible portion is claimed on Schedule A (Form 1040) under state and local personal property taxes.

Several common vehicle-related taxes are not deductible for personal use. These include federal or state fuel taxes, and tire taxes. Luxury taxes on vehicles are generally not deductible unless considered part of the general sales tax and meeting its criteria. Inspection fees, emissions testing fees, tolls, and parking fees for personal use are also not deductible.

Vehicle Use and Tax Deductions

Vehicle use significantly impacts tax deductibility. A clear distinction exists between personal and business use for tax purposes. If a vehicle is used for business, a broader range of expenses, including certain taxes, may become deductible.

For business use, taxpayers choose between two methods to deduct vehicle expenses: the actual expense method or the standard mileage rate method. Under the actual expense method, a portion of deductible taxes, like sales tax and personal property tax, can be deducted based on the percentage of business use. For example, if a vehicle is used 60% for business, then 60% of eligible sales tax and personal property tax paid could be deducted. Other actual expenses include depreciation, car loan interest, maintenance, repairs, insurance, and fuel. This method requires meticulous record-keeping, including detailed mileage logs and receipts, to substantiate business use and costs.

Alternatively, taxpayers can opt for the standard mileage rate method, a simpler way to calculate business deductions. This rate, set annually by the IRS, is a per-mile amount that includes an allowance for depreciation, insurance, fuel, maintenance, and taxes. For 2025, the business mileage rate is 70 cents per mile. If choosing the standard mileage rate, taxpayers generally cannot separately deduct sales tax, personal property tax, or other actual vehicle expenses, as these costs are incorporated into the rate. However, business-related parking fees and tolls can still be deducted in addition to the standard mileage rate.

The choice between the actual expense method and the standard mileage rate depends on factors like total business miles driven, actual costs, and record-keeping preference. The standard mileage rate is often simpler due to less stringent record-keeping. The actual expense method might yield a larger deduction for vehicles with high operating costs or significant depreciation. Regardless of the method, maintaining accurate records of business mileage and expenses is essential to support claimed deductions. For leased vehicles, if the standard mileage rate is chosen initially, it must be used for the entire lease period.