Do I Get a Tax Break for Buying a Car?
Explore whether buying a car offers tax breaks. Get clear insights into how vehicle use and your tax situation impact eligibility.
Purchasing a car often leads people to wonder about potential tax benefits. Eligibility for tax breaks largely depends on how the vehicle is used and its specific characteristics. Understanding the distinction between personal and business use, along with certain vehicle types, helps clarify where tax savings might apply.
Tax Breaks for Personal Car Purchases
For most personal vehicle acquisitions, there are generally no significant federal tax deductions or credits simply for buying the car. The primary exception involves clean vehicles, which may qualify for a specific credit.
The Clean Vehicle Credit offers a potential tax reduction for buying new, qualified plug-in electric vehicles (EVs) or fuel cell electric vehicles (FCVs). To be eligible, the vehicle must meet several criteria, including a battery capacity of at least 7 kilowatt-hours and a gross vehicle weight rating under 14,000 pounds. Final assembly must occur in North America, and it must satisfy specific critical mineral and battery component requirements. The credit amount, up to $7,500, can vary depending on whether the vehicle meets both critical mineral and battery component requirements.
Vehicle manufacturer suggested retail price (MSRP) limits also apply: vans, sport utility vehicles, and pickup trucks are capped at $80,000, and other vehicles at $55,000. Buyers must also meet income limitations; for new clean vehicles, modified adjusted gross income (AGI) cannot exceed $300,000 for married couples filing jointly, $225,000 for heads of households, or $150,000 for all other filers. Taxpayers can use their modified AGI from the year of vehicle delivery or the preceding year, whichever is less. An updated list of eligible vehicles is available on the IRS website or FuelEconomy.gov.
A separate credit exists for used clean vehicles, offering up to $4,000 or 30% of the sales price, whichever is less. For a used vehicle to qualify, its sale price cannot exceed $25,000, and its model year must be at least two years earlier than the calendar year of purchase. The sale must be conducted by an IRS-registered dealer, and the buyer must meet lower income thresholds: $150,000 for married filing jointly, $112,500 for heads of household, and $75,000 for other filers.
Tax Breaks for Business Car Purchases
Significant tax benefits are available when a car is purchased and used for business purposes. Businesses can choose between two primary methods for deducting vehicle expenses: the standard mileage rate or actual expenses. The choice between these methods can impact the total deductible amount.
The standard mileage rate offers a simplified way to calculate deductions, covering costs such as depreciation, maintenance, and fuel. For 2024, the business standard mileage rate is 67 cents per mile. This method often appeals to small business owners due to its ease of use, as it avoids tracking every individual expense. If the standard mileage rate is chosen for an owned car, it must be used in the first year the car is available for business use, though taxpayers can switch to actual expenses in later years.
Alternatively, businesses can deduct actual expenses, which involves tracking and claiming specific costs related to operating the vehicle for business. This method allows for deductions of depreciation, lease payments, fuel, oil, repairs, insurance, and vehicle registration fees. Depreciation deductions can include Section 179 expensing and bonus depreciation, allowing for an accelerated write-off of the vehicle’s cost. For 2024, the maximum Section 179 expense deduction is $1,220,000, but specific limits apply to vehicles. Vehicles with a gross vehicle weight rating (GVWR) between 6,001 and 14,000 pounds, such as many SUVs and pickup trucks, have a Section 179 deduction limit of $30,500 for 2024.
Bonus depreciation, which is 60% for assets placed in service in 2024, allows businesses to deduct a percentage of the vehicle’s cost in the first year. This can be claimed in addition to Section 179, though the total first-year deduction for certain vehicles is capped. For passenger cars used over 50% for business, the maximum first-year depreciation with bonus depreciation is $20,400 in 2024. The deduction is proportional to the vehicle’s business use percentage, meaning accurate records, such as mileage logs and receipts, are essential.
Sales Tax Considerations
Sales tax paid on a car purchase may be deductible, but only for taxpayers who choose to itemize deductions on Schedule A rather than taking the standard deduction. This deduction is part of the state and local tax (SALT) deduction. Taxpayers can deduct either state and local income taxes paid or state and local sales taxes paid, but not both.
The combined deduction for state and local taxes, including sales tax on a vehicle, is limited to $10,000 per household ($5,000 for married individuals filing separately). For many taxpayers, the standard deduction provides a greater tax benefit than itemizing, making the sales tax deduction irrelevant. Those who itemize should compare their state income tax paid versus sales tax paid to determine which deduction yields the most significant tax savings, considering the overall $10,000 cap.