Can I deduct sales tax on a car purchase?

December 10, 2019 by Chris Rubino, EA
Couple receiving keys from salesman to their new car

Surprisingly to some, sales tax (or use taxes in some jurisdictions if the car is used) on the purchase of a car or automobile may be limited or not deductible, depending on the taxpayer’s “facts and circumstances.” “Facts and circumstances” is a fancy way of saying sometimes yes, sometimes no, or to sum it up in one word – maybe.

So, under what facts and circumstances are sales taxes on car purchases deductible? Generally, the following string of conditions must all be met.

  • The mileage incurred on the car must be for personal use purposes.
  • The taxpayer needs to itemize deductions on the Schedule A.
  • The election must be made to take sales taxes in lieu of income taxes as a deduction on Schedule A. Either the car sales taxes are added to the table amount allowed by the IRS in the area the taxpayer resides, or the car sales taxes are added to the total sales taxes paid on all allowable items if the taxpayer claims actual sales taxes paid in lieu of the table amount.
  • The deductible amount cannot be greater than the general sales tax rate.
  • The taxpayer must have paid the sales tax.
In some places the locality assesses an additional sales tax on vehicles that is above the general rate. If this is the case in your area and the rate charged on cars is greater than the general rate, then the additional tax above the general rate is not deductible − only that portion equal to the general rate is deductible. For example, the state in which you live has a 7% sales tax on all items, but the county in which you live assesses an additional sales tax of 3% on vehicles, meaning you pay 10% sales tax on the purchase of your new car. If deducting sales taxes on the Schedule A, the amount you should deduct for this vehicle is 7% of the car’s cost (the general rate), and you should not deduct the additional 3% local vehicle sales tax.

Remember also that with the advent of the 2018 tax year, sales taxes fall under the so-called SALT cap limitation (SALT = State and Local Taxes). The SALT cap limits the overall deduction on state and local taxes, including sales taxes, to no more than $10,000 per year. So if the total of your state and local taxes exceeds $10,000 without the sales taxes on your new vehicle, then there will be no benefit to you from the deduction, even though you may be entitled to claim it. Do not forget, however, that there may be an advantage to claiming sales taxes in the current year rather than income taxes. That is, if you have a tax refund coming from the state, a portion or all of it will likely be taxable income on your next year’s federal return if you claimed state income taxes as a deduction this year. Conversely, if you claimed state and local sales taxes instead of income taxes on this year’s return, then any refund received this year will not be includable on your next year’s return as taxable income.

Sales taxes on cars include sales taxes on motorcycles, RVs, SUVs, trucks, vans, and off-road vehicles, as well as cars. Lastly, it should be noted that generally if the vehicle is a business use vehicle, then any sales taxes paid are added to the cost basis of the car and depreciated accordingly.

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Chris Rubino, EA
Tax Content Developer

 

Chris’ current job title at TaxAudit is Tax Content Developer. He is an Enrolled Agent, and at present spends most of his time in the Education and Research Department, writing texts for the Education team and researching tax questions that arise during audits. During his time at TaxAudit he has been in a number of roles, including Return Reviewer and Audit Representative. He brought a varied financial background to TaxAudit, including income tax preparation and financial planning advisement. 


 

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