Is There a Tax Break for Buying a New Car?

While buying a new car typically isn’t a direct tax write-off, certain circumstances and vehicle types can offer meaningful tax benefits. These advantages vary based on how the vehicle is used and its type. Understanding these scenarios can help purchasers identify available deductions and credits, potentially easing the financial impact.

Sales Tax Deduction for Car Purchases

Individuals who itemize deductions on their federal income tax return can deduct state and local sales taxes paid on a new car purchase. This deduction is part of the broader state and local tax (SALT) deduction. To claim it, taxpayers must itemize deductions instead of taking the standard deduction, which is a fixed amount. Itemizing typically benefits those whose total eligible expenses exceed the standard deduction amount.

Taxpayers can deduct either state and local income taxes or general sales taxes paid during the year. For many, the sales tax from a new car purchase makes the sales tax deduction more advantageous, especially in states without income tax. This vehicle sales tax is added to other general sales taxes paid when calculating the deduction.

For tax year 2025, the SALT deduction limit is $40,000, with a phase-out for higher incomes. This limit includes sales tax paid on a new vehicle, property taxes, and other state and local taxes. Maintain records, such as sales receipts, to substantiate the amount of sales tax paid.

Federal Clean Vehicle Tax Credits

The federal government offers tax credits for new clean vehicles, including electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs). These credits, available under Internal Revenue Code Section 30D, can provide up to $7,500. Eligibility depends on specific vehicle and buyer criteria. The Clean Vehicle Tax Credit expires on September 30, 2025, due to the One Big Beautiful Bill Act.

Vehicle eligibility depends on battery capacity, gross vehicle weight rating, manufacturer’s suggested retail price (MSRP), and final assembly location. The vehicle must have a battery capacity of at least 7 kilowatt hours and a gross vehicle weight rating under 14,000 pounds. MSRP caps are $80,000 for vans, SUVs, and pickup trucks, and $55,000 for other vehicle types. Final assembly must occur in North America.

The $7,500 credit is split into two $3,750 components, based on critical mineral and battery component requirements. To qualify for the first $3,750, a percentage of critical minerals must be extracted, processed, or recycled in North America or a free trade agreement country. For the second $3,750, a percentage of battery components must be manufactured or assembled in North America. Vehicles meeting both qualify for the full $7,500; those meeting one receive $3,750.

Buyer eligibility is subject to modified adjusted gross income (MAGI) limits: $300,000 for joint filers and surviving spouses, $225,000 for head of household filers, and $150,000 for all other filers. Taxpayers can use their MAGI from the current or preceding tax year. Eligible buyers can transfer the credit to a registered dealership at the point of sale, reducing the vehicle’s purchase price.

Deductions for Business Use Vehicles

When a new car is used for business, tax deductions are available for the portion of its use directly related to business activities. Taxpayers can choose between two primary methods for deducting vehicle expenses: the standard mileage rate or the actual expenses method.

The standard mileage rate simplifies expense tracking by allowing a fixed amount per business mile driven. For 2025, this rate is 70 cents per mile, covering costs like gasoline, oil, maintenance, repairs, and depreciation. This method requires diligent logging of business miles, including date, destination, and purpose.

Alternatively, the actual expenses method allows deduction of specific business costs. This includes gas, oil, repairs, insurance, registration fees, and lease payments. Vehicle depreciation is also deductible, reflecting its gradual loss of value. The deductible percentage of these expenses corresponds to the percentage of business use.

Depreciation deductions benefit 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 2025, the Section 179 deduction limit is $1,250,000, with a phase-out beginning when total equipment purchases exceed $3,130,000. Vehicles must be used over 50% for business to qualify.

Special rules apply to heavy SUVs and trucks with a gross vehicle weight rating (GVWR) over 6,000 pounds. These vehicles may qualify for a higher Section 179 deduction, with a cap of $31,300 for 2025. Passenger vehicles, generally under 6,000 pounds GVWR, are subject to lower annual depreciation limits.

Bonus depreciation provides an accelerated depreciation method, allowing businesses to deduct a percentage of the asset’s cost in the first year. For 2025, bonus depreciation is 40%. This deduction is taken after any Section 179 deduction.

Choosing between the standard mileage rate and actual expenses method often depends on which provides the larger deduction. If the actual expenses method is chosen in the first year, it generally must be used for the vehicle’s entire life. However, if the standard mileage rate is chosen initially, taxpayers can often switch to the actual expense method in subsequent years, provided the vehicle has not been fully depreciated. Meticulous record-keeping, including detailed mileage logs and receipts, is paramount for tax compliance.