If I Bought a New Car, Can I Claim It on My Taxes?

A car purchased for personal use is generally not tax-deductible. Tax benefits related to vehicles arise when the car is used for business purposes or qualifies for specific credits, such as purchasing an electric vehicle. This article explores scenarios where car-related expenses or credits might apply.

Understanding Car-Related Tax Deductions

The fundamental distinction for claiming car-related tax deductions lies in whether the vehicle is used for personal or business purposes. Only the portion of vehicle use directly attributable to a trade or business is generally eligible for deductions. Taxpayers operating a business can choose between two primary methods for deducting vehicle expenses: the standard mileage rate or the actual expenses method.

The standard mileage rate allows a deduction based on a per-mile rate set annually by the Internal Revenue Service (IRS). For 2024, this rate is 67 cents per business mile. This method accounts for costs like depreciation, maintenance, and fuel. Business-related parking fees and tolls can be deducted separately.

Businesses can opt to deduct actual expenses incurred from operating the vehicle. This method includes costs such as gas, oil, repairs, insurance, vehicle registration fees, and lease payments. Depreciation is a significant component, spreading the vehicle’s cost over its useful life. Choosing between these methods often depends on which provides a larger deduction.

Depreciation allocates the cost of a vehicle over its useful life. A portion of the purchase price can be deducted annually for business vehicles. Section 179 allows businesses to deduct the full purchase price of qualifying equipment, including certain vehicles, in the year they are placed in service. For 2024, the maximum Section 179 deduction is $1,220,000, phasing out when total qualifying property exceeds $3,050,000. Certain heavy sport utility vehicles (SUVs) weighing over 6,000 pounds Gross Vehicle Weight Rating (GVWR) are subject to a Section 179 deduction cap of $30,500 for 2024.

Bonus depreciation allows businesses to deduct a large percentage of an asset’s cost in the first year. For assets placed in service in 2024, the bonus depreciation rate is 60%. The rate decreases to 40% in 2025 and 20% in 2026, reaching 0% in 2027. Unlike Section 179, bonus depreciation applies to both new and used qualifying property, provided it is the first use by the purchasing business.

Specific Deductions and Credits for New Cars

Beyond general business deductions, specific tax benefits may apply directly to the purchase of a new car. These benefits are available under particular circumstances and are distinct from those related to ongoing vehicle operation.

One potential tax benefit involves the state and local general sales tax deduction. Taxpayers who itemize deductions on their federal income tax return can choose to deduct either state and local income taxes paid or state and local general sales taxes paid. The sales tax paid on a new car purchase can be included in this deduction. However, this deduction, along with other state and local taxes, is subject to a limitation.

For tax year 2024, the total deduction for state and local taxes (SALT) is capped at $10,000 ($5,000 for married individuals filing separately). For 2025, this cap is scheduled to increase to $40,000 ($20,000 for married individuals filing separately) under recent legislative changes, though this higher limit is temporary and subject to income thresholds. Taxpayers should assess whether itemizing deductions, including sales tax, provides a greater benefit than taking the standard deduction.

Federal tax credits for clean vehicles, particularly new electric vehicles (EVs), can provide significant savings. The Clean Vehicle Credit offers up to $7,500 for qualifying new vehicles. To be eligible, the vehicle must meet specific criteria, including requirements related to the manufacturer, battery capacity, and sourcing of critical minerals and battery components.

The Manufacturer’s Suggested Retail Price (MSRP) of the vehicle must not exceed certain limits: $80,000 for vans, sport utility vehicles, and pickup trucks, and $55,000 for all other vehicles. Income limitations also apply, with modified Adjusted Gross Income (AGI) thresholds of $300,000 for joint filers, $225,000 for heads of household, and $150,000 for all other filers. Since January 1, 2024, buyers can transfer this credit to the dealer at the point of sale, effectively reducing the purchase price.

Required Information and Documentation

Accurate record-keeping is important for supporting any car-related tax claims. Without proper documentation, the IRS may disallow deductions or credits, leading to potential penalties.

For those deducting business use of a vehicle, a detailed mileage log is necessary. The log should record the date, starting and ending odometer readings, total miles, destination, and business purpose for each trip. Differentiating between business, commuting, and personal miles is important, as only business miles are deductible.

Retaining all receipts for actual car expenses is important if choosing that deduction method. This includes receipts for fuel, oil changes, maintenance, repairs, insurance, and vehicle registration fees. For car loans, Form 1098-E, which reports interest paid, is necessary. Lease agreements and records of lease payments are also required if the vehicle is leased for business purposes.

Vehicle information must be available. This includes the Vehicle Identification Number (VIN), the date the vehicle was purchased, its original cost, and the date it was first placed in service for business use. This data is needed for calculating depreciation or supporting other vehicle-related claims.

When claiming the state and local general sales tax deduction, documentation of sales tax paid on the vehicle is necessary. This is typically found on the purchase agreement or invoice. This document serves as proof of the tax paid, which can then be included in your itemized deductions.

For the Electric Vehicle (EV) tax credit, specific documentation from the manufacturer or dealer is required to verify eligibility. This includes confirmation that the vehicle meets the battery capacity, critical mineral, and battery component requirements. The manufacturer’s statement of origin or a similar document proving the vehicle’s qualifying status and MSRP is important.

Reporting Car-Related Claims on Your Tax Return

Once all necessary information and documentation are gathered, the next step involves reporting these claims on the appropriate tax forms. The specific forms used depend on the car’s use and the type of deduction or credit being claimed.

Self-employed individuals report their vehicle expenses on Schedule C (Form 1040). If using the standard mileage rate, total business miles driven are multiplied by the IRS standard rate and entered on Schedule C. For those using the actual expenses method, specific costs such as fuel, repairs, insurance, and interest on a car loan (for the business portion) are itemized. Depreciation (including Section 179 or bonus depreciation) is calculated on Form 4562 and transferred to Schedule C.

For most employees, deducting car expenses is no longer possible due to changes in tax law. Form 2106, Employee Business Expenses, was historically used for unreimbursed employee business expenses. Its use is now very limited, generally applying only to certain qualified performing artists, fee-basis government officials, or individuals with disabilities.

The state and local general sales tax deduction is reported on Schedule A (Form 1040), Itemized Deductions. It falls under the “Taxes You Paid” section. Taxpayers must elect to deduct general sales taxes instead of state and local income taxes to include this amount. The total state and local tax deduction remains subject to the applicable annual cap.

The Clean Vehicle Credit for new electric vehicles is claimed using Form 8936, Clean Vehicle Credit. A separate Schedule A (Form 8936) is often needed for each vehicle’s eligibility. Information from Form 8936, including the calculated credit, is transferred to Form 1040 to reduce overall tax liability. If the credit was transferred to the dealer at the point of sale, this must also be indicated on Form 8936.