How To Qualify For The Vehicle Sales Tax Deduction

Purchasing a car gets expensive fast, especially when browsing for a sports car or luxury SUV. A noticeable chunk of the cost falls under the sales tax, which you pay as soon as you register the vehicle at the DMV. 

It might leave you wondering if there’s any way for you to avoid paying it, or at least deduct it. And although in some states, like Alaska, you don’t pay this tax at all, there are a few things you could do to ease things up a fair bit.

Itemizing Tax Deductions

There are two ways to get a tax deduction. The first is to get a standard deduction, which is a single fixed amount. The second is to itemize deductions on Schedule A of your income tax return form (federal form 1040).

To qualify for the sales tax deduction, you always need to itemize. Remember that a standard deduction could give you more than all your allowable itemized deductions, and don’t hesitate to choose it. 

If you proceed with itemizing deductions, you can choose to deduct general sales tax or local and state income tax. If you paid more in state and local sales tax than in state and local income tax, you better go for a general sales tax deduction. Again, you must check where the sums were high enough and determine how to proceed.

General Sales Tax

The sales tax rate on your vehicle purchase must be the same as the general sales tax rate, as you can only deduct the general sales tax rate. There are two ways to calculate the deduction. The first one is to collect all your sales receipts and deduct the sales taxes you paid throughout the year, including the car sales tax. The second one is to use IRS sales tax tables. The tables calculate the estimated sales tax you paid based on your income, but they do not include big purchases like cars, boats, motorcycles, motor homes, and airplanes. So after calculating in the table, you need to add the sales tax to what was listed above. 

There is a $10 000 limit ($5 000 if MFS) on the amount of sales tax you can claim from 2018 to 2025. Depending on your choice, it applies to the total amount a person could claim for real property taxes, personal property taxes, local and state income taxes, or general sales tax.

If you bought a vehicle for business, you could deduct the sales tax on the business tax return. In this case, you must fill in Schedule C Form 1040 and cannot claim sales tax on Schedule A. 

If you go for local, sales, and state income tax deductions, you need to claim it the same year you purchased the vehicle.

Tax Credits And Recommendations

As it’s challenging to navigate the laws, we compiled a small list of recommendations and general tips on dealing with taxes in various cases. It goes as follows:

•  If you take out a loan to buy a car, sales tax is imposed anyway, and you should pay it straight away when registering a vehicle. This rule applies even if you must pay the loan within two or more years.
•  If you are doing a trade-in, sales tax is also imposed. The amount to be taxed depends on the state’s law – in 42 states, the sales tax is returned from the difference between the value of a new vehicle and the trade-in amount you get. In some states, i.e., California, sales tax is returned on the total price of a new vehicle.
• In most cases, dealer rebates and incentives also do not affect the vehicle sales tax as it applies before these discounts. 
•  If you buy an electric vehicle, you may be lucky to qualify for the sales tax credit as you contribute to ecology and energy consumption reduction. According to the IRS, you can claim the credit “if you purchased a car or truck with at least four wheels and a gross vehicle weight of fewer than 14,000 pounds that draws energy from a battery with at least 4 kWh and may be recharged from an external source”. The credit must be claimed the same year you started driving the EV, and you must have purchased it not earlier than 2010. 

Summary

You can claim the deduction if you live in a state where vehicle sales tax is imposed. To do this, you need to either itemize your deductions in the tax return form or go for a general sales tax deduction. You should remember that since you can claim only one type of deduction, some options could be more beneficial for you than others, and you need to consider them carefully.

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