Every April, millions of Americans file taxes on their own, and many wonder if they successfully claimed all the deductions to which they are entitled. One overlooked type of deduction is the car deduction. Business owners who use vehicles as part of their day-to-day operations know that this deduction exists, but people who use cars for personal reasons typically do not. So, what vehicle tax deductions might you be entitled to?
How Do You Use Your Vehicle?
There are three basic types of vehicles:
- Those that are used specifically for business
- Those that are used entirely for personal reasons
- Those that are used for a combination of each
Each of these types qualifies for certain vehicle tax deductions and write offs.
If you fall into the category of using your vehicle for both business and personal reasons, you will need to maintain very careful and detailed records and keep the two types of expenses separate. These records are extremely important to have, not only so you can accurately record your deductions, but also because you will need them if you are ever the subject of a tax audit.
If you fall into the category of using your car for a combination of business and personal reasons, you may benefit from a commercial auto insurance policy. It provides liability protection that will help you recover if you cause an accident while using your car for company purposes. Many people don't realize that standard auto insurance may not cover you when you're using your car commercially - so check with an independent Trusted Choice® agent if you need more information, or more coverage.
Qualified Vehicle Tax Deductions for Business Use
Many people find that they must use their personal cars or trucks for work purposes. Some examples include driving to off-site business meetings, driving to pick up supplies and driving on business trips.
Generally, if you go on a business trip, your company will compensate you for mileage once you file your expense report. In such a case, you cannot also claim this mileage as a vehicle tax deduction when you file your taxes.
What you can deduct are any of the following work-related expenses that the company you work for does not compensate you for:
- Mileage put on your vehicle for work-related purposes: For miles driven in 2013, you can deduct 56.5 cents per mile. For miles driven in 2014, the deduction is set at 56 cents per mile. Alternately, you can elect to deduct your actual costs instead. See more about that later in the article.
- Parking and tolls: If you must drive on toll roads or pay for parking when on work-related business, you may deduct this expense. Exceptions apply if you are paying for tolls during your commute to and from work.
- Interest on your car loan: This deduction is only applicable to self-employed people who use their vehicle primarily for work-related purposes. If you plan to use this deduction, you should seek the advice of a tax advisor or financial consultant when completing your tax returns.
You cannot deduct the following expenses:
- Miles commuting to and from work: There are exceptions. If you are self-employed and need to drive to different work sites to do your job, this mileage is deductible. Similarly, if you own rental property and frequently need to drive to the rental sites for routine maintenance or other business-related matters, this mileage is deductible.
- Speeding tickets and parking fines: Even if you are late for a very important work-related meeting, you won't get a deduction for fines you pay for breaking local laws.
Qualified Vehicle Tax Deductions for Personal Use
You may also be able to claim automobile tax deductions for personal car expenses. If you are uncertain whether you qualify for any of these deductions, speak with a tax professional for guidance:
- Charitable work deductions: You may be able to deduct miles that you put on your car doing volunteer or charitable work, although the deduction rate is not nearly as high as it is for work-related mileage. In both 2013 and 2014, the mileage rate for charitable service is 14 cents a mile. Political-action volunteer work is not tax-deductible.
- Medical deductions: You may claim a deduction for driving and parking expenses related to your personal medical care under certain conditions. The mileage reimbursement rate for medical purposes is 24 cents per mile for the 2013 tax year and 23.5 cents per mile for 2014. You can take this deductions only for the following reasons:
- Your medical expenses for the year exceed 10 percent of your adjusted gross income, or
- You or your spouse is 65 years or older and your medical expenses for the year have exceeded 7.5 percent of your adjusted gross income. This 7.5 percent threshold is applicable through 2016.
- Job search deductions: If you are unemployed and have put a lot of miles on your vehicle as part of your job search, you may be able to claim a mileage deduction. This deduction can be tricky, however, so it is best to discuss it with a tax professional.
- Moving deductions: If your employer transfers you to a new location or your accept a different job that is at least 50 miles from your previous job location, you may deduct the mileage costs associated with your moving expenses. You get these miles reimbursed at a rate of 24 cents per mile for the 2013 tax year and 23.5 cents per mile for 2014.
- Certain car accident costs: If you are involved in an accident and the at-fault party fails to fully compensate you for your losses, you may be able to deduct your expenses as a casualty loss. Even if you get compensation and you repair your car, if it has significantly dropped in resale value, you may be able to deduct this loss as well.
- Sales tax on purchase of new (or used) car: If you itemize your deductions rather than take the standard deduction, you can benefit from the inclusion of the sales taxes on your vehicle if you purchased it during the tax year for which you are filing.
Other Possible Automobile Tax Deductions
The following are tax deductions for your automobile that may not apply in all areas of the country:
- Vehicle registration fees: Most states charge an annual vehicle registration fee. You can include this fee as part of your itemized deductions. If, however, you use the standard deduction when you file your taxes, this deduction will not alter the amount of your taxes due.
- Personal property tax: Not all states or counties collect a personal property tax from residents. If you are required to pay a property tax on your vehicle where you live, you may be able to deduct this tax amount from your taxes. This, too, would be included as part of your itemized deductions.
Should You Go with the Standard Mileage Rate or Actual Expenses?
As mentioned above, when claiming a deduction for business-related auto use, you have the option to deduct actual expenses rather than accept the standard mileage rate. However, choosing the former requires far more record-keeping and more complex calculations, and it is not likely to make a significant difference in your overall deduction. In some cases, choosing to go with actual expenses will actually end up costing you more.
That said, if you wish to deduct your actual vehicle expenses, you can include the following costs:
- Repairs and maintenance, including oil changes
- Vehicle depreciation
- Fuel costs
- Insurance coverage costs
Get All the Automobile Tax Deductions You Deserve
Completing your tax returns accurately and getting all the deductions you are entitled to takes a bit of finesse. Whether you do your paperwork on your own or through an accountant or tax-preparation service, it is best to be aware of the deductions that may be available to you.
Your accountant may not know that you drive 15 miles every month to attend business meetings or that you did not receive full compensation for a car accident for which you were not at fault. Unless you are aware that these deductions exist, you are not likely to bring them up.
Please contact your accountant about this.