Can You Get a Tax Break for Buying a Car?

Many wonder about potential tax benefits when buying a car, especially with rising costs and interest in environmentally friendly transportation. While a general “tax break” for every car purchase does not exist, specific situations and vehicle types can offer significant tax advantages. This guide explores scenarios where vehicle purchases or related expenses may qualify for federal tax credits or deductions.

Eligibility and Requirements for Clean Vehicle Credits

The federal government offers tax credits to encourage the adoption of new and used clean vehicles. These incentives promote domestic manufacturing and reduce emissions, but they come with specific requirements for both the vehicle and the buyer.

New Clean Vehicle Credit (IRC Section 30D)

To qualify for the New Clean Vehicle Credit, which can be up to $7,500, the vehicle must meet several criteria. It needs a battery capacity of at least seven kilowatt hours and a gross vehicle weight rating of less than 14,000 pounds. The vehicle must be manufactured by a qualified entity and undergo final assembly in North America.

The vehicle must also satisfy critical mineral and battery component sourcing requirements. As of 2025, 60% of the battery’s critical minerals must be extracted or processed in the United States or a country with a free trade agreement, or recycled in North America. Starting in 2025, eligible vehicles cannot contain critical minerals extracted, processed, or recycled by a “Foreign Entity of Concern.” For battery components, 60% must be manufactured or assembled in North America for 2025.

The manufacturer’s suggested retail price (MSRP) is also a factor. For vans, SUVs, and pickup trucks, the MSRP cannot exceed $80,000. For all other vehicle types, the MSRP limit is $55,000. The vehicle must be purchased for personal use, not for resale, and primarily used in the United States.

Buyer eligibility for the New Clean Vehicle Credit has Adjusted Gross Income (AGI) limitations. For married couples filing jointly, the modified AGI cannot exceed $300,000. For heads of household, the limit is $225,000, and for all other filers, it is $150,000. You can use your modified AGI from the year you take delivery of the vehicle or the year prior, whichever is less.

Used Clean Vehicle Credit (IRC Section 25E)

A credit of up to $4,000 is available for qualifying used clean vehicles, equal to the lesser of $4,000 or 30% of the sale price. This credit applies to vehicles purchased from a dealer for $25,000 or less. The sale price includes all dealer-imposed costs or fees not required by law, but excludes taxes or title and registration fees.

The used vehicle must have a model year at least two years prior to the calendar year of purchase. For example, a vehicle purchased in 2024 would need to be a 2022 model year or older.

The buyer cannot be the original owner of the vehicle and cannot have claimed another used clean vehicle credit in the three years prior to the purchase date.

Buyer income limitations apply to the Used Clean Vehicle Credit. The modified AGI cannot exceed $150,000 for married couples filing jointly, $112,500 for heads of household, or $75,000 for all other filers.

Residential Clean Energy Credit (IRC Section 25D)

While not directly for vehicle purchase, the Residential Clean Energy Credit can offset costs related to home charging equipment for electric vehicles. This credit equals 30% of the costs of new, qualified clean energy property for your home installed from 2022 through 2032.

The credit is nonrefundable, meaning it can reduce your tax liability to zero, but any excess credit cannot be refunded. However, any unused credit can generally be carried forward to reduce tax owed in future years.

Claiming Clean Vehicle Credits and Post-Purchase Steps

After a qualifying clean vehicle purchase, specific steps are necessary to claim the associated tax credits. The process involves coordination with the seller and proper tax form submission to the Internal Revenue Service (IRS).

The seller plays a central role in the credit claim process. For eligible clean vehicles placed in service on or after January 1, 2024, the seller must submit a time-of-sale report through IRS Energy Credits Online within three calendar days of the sale date. This report verifies the vehicle’s eligibility and the buyer’s information to the IRS.

The seller must also provide the buyer with a copy of the accepted seller report within three calendar days of submission. This report contains important details the buyer needs to claim or reconcile the credit on their income tax return, including:

• Seller’s and buyer’s names and taxpayer identification numbers
• Vehicle identification number (VIN)
• Battery capacity
• Date of sale
• Sale price
• Maximum allowable credit

To claim the Clean Vehicle Credit, taxpayers must file Form 8936 with their federal income tax return. This form helps calculate the specific credit amount for each qualifying vehicle placed in service during the tax year.

For vehicles placed in service in 2024 or later, buyers can elect to transfer the credit to the dealer at the time of sale, reducing the vehicle’s purchase price. Even if transferred, the buyer must still file Form 8936 with their tax return to detail the vehicle purchase and credit transfer. Clean vehicle credits are generally nonrefundable, meaning they can reduce your tax liability to zero, but any excess credit cannot be refunded or carried forward to future tax years if claimed as an individual credit.

Deducting Vehicle Expenses for Business Use

Beyond clean vehicle credits, businesses can often deduct expenses for vehicles used for trade or business purposes. This applies to self-employed individuals and business entities, but generally excludes commuting costs. Two main methods exist for calculating these deductions: the standard mileage rate and the actual expenses method.

Standard Mileage Rate

The standard mileage rate simplifies vehicle deductions. This rate, set annually by the IRS, accounts for various operating costs, including depreciation, gas, oil, repairs, and insurance. For 2025, the business standard mileage rate is 70 cents per mile driven.

To use this method, you must keep a detailed record of your business miles, including total miles driven for the year and total business miles. If you own the vehicle, you must use the standard mileage rate in the first year it’s available for business use; in subsequent years, you can choose between this method and actual expenses.

Actual Expenses Method

The actual expenses method involves tracking and deducting the specific costs of operating your vehicle for business. This approach requires more detailed record-keeping but can sometimes result in a larger deduction, depending on your vehicle and expenses. Deductible expenses include:

• Gas and oil
• Maintenance and repairs
• Tires
• Vehicle registration fees
• Insurance
• Lease payments

Depreciation is a key part of the actual expenses method. Businesses can recover the cost of the vehicle over its useful life. Special provisions like Section 179 deduction and bonus depreciation allow for accelerated deductions in the year the vehicle is placed in service.

For Section 179, the vehicle must be used more than 50% for business. The deduction is subject to annual limits and a phase-out if total asset purchases exceed certain thresholds. For 2024, the Section 179 deduction limit is $1.22 million, with a phase-out threshold of $3.05 million. For heavy SUVs with a gross vehicle weight rating between 6,001 and 14,000 pounds, the Section 179 deduction is capped at $30,500 for 2024.

Bonus depreciation allows businesses to deduct a percentage of the asset’s cost in the first year, regardless of profit. While it was 100% for assets placed in service through 2022, bonus depreciation is gradually phasing out: 60% for 2024 and 40% for 2025. For luxury vehicles, additional depreciation limits apply. For example, in 2024, the first-year depreciation limit is $20,400 if bonus depreciation is claimed.

Regardless of the method chosen, maintaining detailed records is crucial. Mileage logs, receipts for all actual expenses, and documentation of the business-use percentage are crucial for substantiating your deductions in case of an IRS inquiry. The business-use percentage is calculated by dividing business miles by total miles driven.

Other Car-Related Deductions

Beyond clean vehicle credits and business-use deductions, other specific scenarios may allow for car-related tax deductions. These deductions are generally less common or have more restrictive eligibility criteria. They are typically claimed as itemized deductions on Schedule A (Form 1040).

Sales Tax Deduction

When purchasing a vehicle, you may be able to deduct the state and local sales taxes paid. This deduction is available if you itemize deductions on Schedule A and choose to deduct sales taxes instead of state and local income taxes. This choice is usually beneficial if the sales tax paid exceeds your state and local income taxes.

The deduction for state and local taxes, including sales tax, property tax, and income tax, is limited to $10,000 per household annually. You can either save receipts for all actual sales taxes paid throughout the year or use the IRS sales tax tables to figure your deduction. Sales taxes on motor vehicles are deductible as a general sales tax, even if the rate was different from the general sales tax rate.

Medical Expense Deduction

In specific circumstances, the cost of a vehicle or its modifications can be included as a medical expense deduction. This applies to vehicles specially equipped for a person with disabilities or modifications made for medical purposes. This can include the cost of:

• Special hand controls
• Wheelchair lifts
• Ramps
• Other equipment installed in a car for a person with a disability

The cost of the vehicle itself is generally not deductible, but the difference between the cost of a regular car and one specially designed to hold a wheelchair can be included. To claim this, your total medical expenses must exceed 7.5% of your Adjusted Gross Income (AGI). Only the amount exceeding this percentage is deductible on Schedule A.