Deductible Taxes When Purchasing a Vehicle
The special vehicle sales tax deduction allowed under the American Recovery and Reinvestment Act of 2009 has been allowed to expire, but you can still take a deduction for sales taxes when you purchase a car for personal use. Business-use vehicles allow you additional deductions for depreciation. Alternative-fuel vehicles purchased by December 31, 2010 also qualified for special tax treatment.
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Sales Tax Deduction
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When you purchase a vehicle for personal use, you may deduct the sales tax on your Schedule A. This requires you to itemize your deductions. Recent changes in the law now require you to choose whether to deduct state income tax paid or state sales tax paid during the year, not both. You will need to determine whether the sales tax paid on the vehicle was greater than the state tax withholding shown on your Form W-2 (Wage and Tax Statement). If your sales tax on the new vehicle was more than the state tax withheld, mark box b on Schedule A, line 5. Use the online sales tax deduction calculator at the IRS website to determine what amount to put on line 5b for sales tax. Depending on your income and the cost of the vehicle, you may find the state income tax deduction will be larger. If you do not itemize your deductions, you will be unable to take advantage of the either the state sales or income tax deduction. However, it is best to complete Schedule A anyway to be certain you do not have enough other deductions to exceed the standard deduction for your filing status.
IRS Online Sales Tax Deduction Calculator
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The IRS has a useful tool which allows you to determine how much sales tax you may deduct in a year when you had a large purchase, like a new vehicle, home or other large-ticket item. The calculator estimates how much sales tax you paid on regular purchases, then adds the actual amount of tax paid on the vehicle, to ensure you get the full deduction you deserve. You will need information about your income, your number of exemptions and where you lived, as well as the actual amount of sales tax paid on the vehicle. Refer to your W-2 from your employer and the sales receipt from the purchase of the vehicle to answer the questions. Put the resulting figure on Schedule A, line 5.
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Business-Use Vehicle
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If you purchase a vehicle for business use, you cannot deduct the full cost of the vehicle in the year you acquired it. Instead, you depreciate the cost of the car over its useful life, calculated according to IRS depreciation rules. Publication 463 (Travel, Entertainment, Gift and Car Expenses) has detailed information and tables about how to determine the depreciation amount for your particular vehicle and business situation. You may include sales tax, license fees, and other costs associated with purchasing the automobile. The sum of these is depreciated over five years. Additionally, costs of maintenance and gasoline may be deducted in the year incurred, rather than depreciated, as expenses of operating the vehicle.
Hybrid Vehicle Credit
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The IRS offered an additional credit of up to $3,000 for certain hybrid vehicles purchased by December 31, 2010. As of the date of this article, the credit has not been renewed by Congress. However, if you failed to file the correct forms to take the credit for a car purchased during the eligible period, you can file an amended return. Check the IRS website to determine if your vehicle qualified during the year you purchased it. If so, file Form 1040X (Amended U.S. Individual Tax Return).
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