How to Buy a New Car for a Tax Deduction

It's an exhilarating feeling to finally drive off the lot with your new car, right up until you receive the first bill in the mail for your loan payment. Buying a new car is expensive, but it's a necessity for many people who need reliable transportation. Luckily, when you buy a new car, you might be able to take a tax deduction related to the transaction.

Step 1

Decide if you're likely to itemize deductions on your taxes. Note that, if you take the standard deduction every year, you may not be able to get a tax deduction related to the purchase of your new car.

Step 2

Determine the amount of sales tax on your car. It is the final sales price multiplied by the state sales tax rate. Pay the sales tax for your new car and keep a copy of the records. You will pay this cost either at the dealership or at a local Department of Motor Vehicles.

Step 3

Keep track of your mileage when you use your new car for medical reasons, work-related moves and charitable purposes. The IRS allows you to take a standard mileage rate deduction for these activities in some cases. The standard mileage rate is 50 cents (14 cents for charity), as of 2010. If you used the car for business purposes, you may be able to deduct the mileage rate for that as well.

Step 4

Choose the option to deduct general sales tax (option 5b) under the "Taxes You Paid" section on your Schedule A form, when filing taxes for that year. List the amount of sales tax you paid for your new car, in addition to other general sales taxes you've paid during the year. Keep in mind that, if your state income taxes exceed the total amount of sales tax you paid during the year--including the new car purchase--it's more beneficial to check that option (5a) instead.

Step 5

Deduct your standard mileage rate for using your new car on the other applicable tax forms. If for a covered work-related move, you would list the deduction on Form 3903. For charity and medical reasons, use Schedule A. For business mileage you'd deduct the mileage on Schedule C.

Tip

  • Note that some special deductions related to cars only apply to certain tax years. For instance, in 2009, a new car buyer could deduct the sales tax on the purchase, even if he took the standard deduction instead of itemizing, but that only applied to certain purchases in 2009.

Warning

  • Consult a tax adviser or professional, before taking deductions on your taxes related to a vehicle.

About the Author

Louise Balle has been writing Web articles since 2004, covering everything from business promotion to topics on beauty. Her work can be found on various websites. She has a small-business background and experience as a layout and graphics designer for Web and book projects.