I Got a New Car - Can I Deduct My New Vehicle's Sales Tax?

September, 15 2022 by Steve Banner, EA, MBA

First of all, congratulations on your new car. I’m sure it wasn’t cheap, so no wonder you’re looking for a way to claw back some of those hard-earned dollars you laid out for your new ride! The good news is there is a very good chance you can get a deduction at the end of the year for the State sales taxes that you had to pay before you could get out on to the road in your shiny new automobile.

However, the way you go about claiming the deduction depends on whether your use of the car is mostly for personal or business purposes.
 

Business Use

We’ll start with business use. Let’s assume that you’re a self-employed house painter and you bought a new SUV to carry your supplies and visit potential customers to provide quotes on their painting needs. The tax code allows you to claim a deduction for the business use of your vehicle, and this deduction includes an amount for the car’s depreciation in value over time. The actual calculation for depreciation is beyond the scope of this article, but the point is you receive a deduction for the amount by which the car’s value has declined during the year. The original value of the car for the depreciation calculation includes not only the selling price of the car but also the sales tax and any other up-front costs that were associated with your purchase. Thus, you do get a deduction for the sales tax you paid, but instead of getting the full deduction all at once, you get a portion of it each year that you use the car for business up until the car is fully depreciated.
 

Personal Use

If you use the new car mostly for personal purposes, then you may be able to deduct your sales taxes on the car on Form 1040 Schedule A, Itemized Deductions. You would use this form if the total that you spent on sales and other taxes, mortgage interest on your primary residence and one other property, charitable contributions, and medical expenses that were greater than 7.5% of your adjusted gross income (AGI), exceeds the following amounts for your filing status in 2021:

• Married Filing Jointly or Qualifying Widow(er): $25,100
• Head of Household: $18,800
• Single or Married Filing Separate: $12,550

The above threshold amounts are increased for taxpayers who are blind, or age 65 or above.

If you qualify to itemize your deductions, you can deduct the amount of State sales tax you paid under the heading of “Taxes You Paid” on Schedule A. This category also includes some other types of taxes, but the total amount you can claim is limited. For tax years 2018 through 2025, the itemized deduction for state and local income taxes (or general sales taxes) paid, real estate taxes, and personal property taxes, is limited to $10,000. The deduction for any remaining amount is lost and, worse still, the deduction is limited to $5,000 if your filing status is married filing separately.

Deductions for the first two categories of taxes are mutually exclusive. That is, you must choose to deduct on your federal income tax return either:

• the state and local income taxes you paid,
   
• OR
   
• the state and local general sales taxes you paid.

You cannot claim both, so obviously it would make sense for you to review both deductions and then decide which of the two to claim. Under the subheading of State and local general sales taxes, you can claim either the actual amount of State and local sales taxes you paid for the year or the amount determined from the IRS sales tax tables. These tables provide an estimated amount based on your location, income, and size of household. Most taxpayers do not manage to keep receipts for all their purchases, so the most practical solution is to use the amount from the state and local sales tax tables and add to it any other local general sales taxes imposed in your location. The sales tax you paid during the year on any large purchases such as motor vehicles, boats, or homes can also be added to this amount.

But don’t forget that your total deduction for these “Taxes You Paid” on Schedule A is limited to either $10,000 or $5,000.
 

Conclusion

Depending on your individual circumstances, you may qualify to use either of the above methods to claim the sales tax on your new car – but you cannot use both. Keeping complete and accurate records is important so that you can claim the correct amount of the deduction for which you qualify. And with the rising price of gas these days – and electricity for the EV owners – every penny counts!