If you're in the market for a used car, you may consider purchasing from a private seller instead of a dealership. This is a great way to find a vehicle that meets your needs and fits your budget. However, there are some important considerations to keep in mind when buying from an individual. First off,…
Writing-off eligible car expenses could save you a ton of money on taxes. So what can you deduct?
Did you know that the average American family spends around 13% of their take-home pay on car-related expenses? That’s a lot of money, and you might be thinking about ways you can recoup this cost. One of the best and often-overlooked ways to save is by writing-off your car expenses on your taxes. This is not direct tax advice, but rather a starting point for you to consult with your chosen tax professional. Here’s what you need to know:
Can I Write-off My Car Expenses?
There are a few situations you can use to your advantage when it comes time to file your personal taxes. We’ll get more into the details below, but if you drive for volunteer work, or to receive medical care, you may be able to deduct some costs. If you buy an electric vehicle (EV) or donate your car, you’ll also be able to deduct a certain amount from your personal taxes.
But if you’re self-employed, things get a lot better. You don’t necessarily have to be a fancy-pants full-time business owner either. Any freelancer or independent contractor will qualify, including part-time Uber and Lyft drivers, Rover pet sitters, or any other app-based side hustle that requires you to drive.
To help you zero in on what’ll be the most useful for you, we’ll split up car-related tax write-offs into two categories: personal and business.
What Car Expenses Can I Claim on My Personal Tax Return?
The tax write-offs you’ll get on your personal tax return may not be quite as consistently good as for business owners, but that doesn’t mean it’s not worth putting in the time to get what’s due to you.
There are two different ways you can help others while also lowering your tax bill at the same time. You can only deduct charitable donations for qualified tax-exempt charities, which you can find here. In addition, you can only claim these charitable deductions if you itemize your taxes — something that isn’t as useful anymore, since the passage of the Tax Cuts & Jobs Act bumped up the standard deduction. Many taxpayers find it more useful to just take the standard deduction, rather than to use itemized deductions.
Deducting driving costs when you volunteer
If you’re volunteering for an organization where you’re driving around a lot — such as if you’re collecting data for community science projects or making deliveries for Meals on Wheels — you may be able to deduct the cost.
The easiest way to do this is by taking the standard mileage deduction, which is 14 cents per mile. This means for every 100 miles you drive for that charity, you can write-off $14 from your taxes. You will need to keep actual mileage log records if you opt for this in case the IRS comes knocking; you can’t just guess on how many miles you drove, unfortunately.
Deducting a car donation
Do you have a car lying around that you’re not interested in selling? Even if it’s an old clunker that doesn’t run anymore, many charities are more than willing to come pick it up so they can auction it off and use the funds for the nonprofit. Or, if it’s still running, they may use it for their own operations, or offer it to someone in need.
Depending on what the charity ultimately does with it, you may be able to claim either its actual sales value (if the charity sells it), $500, or its fair market value. The charity can issue you a Form 1098-C which you can use to determine how much you can deduct.
Driving for medical treatment
Dealing with high medical bills can be extremely frustrating in this country, but the IRS does offer a way to lighten the burden at least a tad.
There are a few qualifications, though. You’ll need to itemize your taxes, which, as we noted above, isn’t something that many people are doing anymore. You’ll also only be able to deduct medical expenses above 7.5% of your adjusted gross income (AGI). So if you spent 10% of your AGI on medical expenses, for example, you can only deduct 2.5% of that cost.
Once you’re above that threshold, however, you can deduct most medical costs from your taxes, including car-related travel expenses. The easiest way is to log your miles and take the standard mileage deduction of 16 cents per mile. This could be very useful to you if you live in a rural area, for example, and have to travel frequently for treatments.
New EV purchases
One of the most powerful tax incentives right now is for new EVs — and we mean new. You aren’t eligible for this credit if you purchase a used EV, or if you lease it. There are also some wonky rules in place where the tax credit begins to phase out after the first 200,000 models are sold for each EV. Tesla and GM EVs sold out early, and so there is no federal tax incentive for these cars right now. But there are still many available, which you can see here.
Tax credits are much more powerful than simple tax deductions because rather than lowering the amount of income you pay taxes on, it allows you to lower your tax bill dollar-for-dollar. You can potentially drop your tax bill all the way down to $0 and even get a hefty tax refund back from the taxes you’ve already paid throughout the year. However, this particular tax credit is not refundable, meaning even if your taxes owed drops below $0, you won’t receive money back for this one. Still, it’s a powerful tool.
I’m Self-employed, What Car Deductions Can I Claim?
If you drive your car as a part of your self-employment, even as a part-time side hustle, writing-off car expenses on your taxes can be a great way to recoup some of your costs. You aren’t allowed to deduct your normal commuting costs of driving to and from work (if you work in a shared coworking space, for example). But if you drive around to conduct business in different places, you should take advantage of these options.
How do I write-off my small business car taxes?
It’s not hard to write-off your car business expenses on your taxes, but you will need to keep some records. You’ll record these deductions on your Schedule C, Schedule K-1, or whatever form your business uses to file its tax return each year. There are two ways to go about doing it:
The first — and easiest — option is to simply take a standard mileage rate. For every mile you drive your car, you can deduct 57.5 cents from your taxes. In other words, for every 100 miles you drive for your business, you can lower the amount of income that you pay taxes on by $57.50.
The second — and possibly trickier — option is to deduct the actual costs you pay for your car. If you only use your car for business use, then it’ll be pretty straightforward: all costs are business-related, and you can deduct all eligible expenses. But if you also use your car for personal use, then you’ll need to do a bit more math to figure out which costs are business-related, and which are personal.
What if I use my car for personal and business use?
Writing-off car expenses from your taxes is easy if you have a dedicated business car. But most of us aren’t in that situation and use the same personal vehicle for business use. And for us, the IRS has a solution.
The easiest option is to simply log the miles that you drive for business alone, and take the standard mileage deduction of 57.5 cents per mile. But if you’d rather deduct your actual costs, you’ll need to tally these all up and then figure out which percent was for business use, and which was for personal use.
You can do this by logging your miles. Take an odometer reading at the start of the year, at the end, and each time in between when you drive for a business job. You can then do the math to figure out which percent of your driving was for business, or personal, and apply that to your actual costs.
For example, let’s say you start the year with an odometer reading of 10,000 miles. At the end, your odometer reading is 20,000 miles. In between, you drove 5,000 miles for business. So, you drove 10,000 miles total and 5,000 just for business, meaning that it’s an even 50/50 split between business and personal usage. If you spent $1,000 on your car in this time frame, you can deduct $500.
If it sounds a bit confusing, it is — and that’s why many people just opt to record their business miles, and take the standard mileage deduction.
How do I keep track of my miles?
Unless you only drive your car for your business and tally up your actual costs, you’ll need to record your business mileage in order to deduct your business car use from your taxes. Luckily, there are a few ways to do this recordkeeping.
Many people opt for an old-school approach, and just keep a notepad or logbook in their glove box with a pencil. Each time you take a business trip, write the mileage before you start, and when you’re back. At the end of the year, sit down for a calculator-fest to crunch the numbers. If you want a spiffier approach, there are lots of apps on the market that do the same thing, such as MileIQ, Everlance, or TripLog.
Can I write-off my car loan?
Yes, self-employed people can write-off their car loan for business purposes — but only the interest, and only the percentage of time the vehicle is used for business. For example, if you’ve calculated that you use your car about 75% of the time for business (and are claiming that percentage on your taxes) you can deduct the same percentage of your auto loan interest. Even if you opt for the standard mileage deduction, you can still deduct any additional car loan interest costs.
What Other Vehicle Expenses Can I Write-off?
If you use the actual expense method instead of taking the standard mileage rate, you can deduct a wide range of costs:
- Garage rent
- Car insurance
- Lease payments
- Registration fees
- Maintenance and repairs
- Parking fees and tolls (note: you can still deduct these even if you take the standard mileage deduction)
One special thing to note is the depreciation deduction. You can actually write-off the decrease in value that your car sees as it naturally ages and becomes less valuable. However, you can only do this if you use your car for business 50% of the time or more. If you only use it occasionally for business use compared to personal use, for example, you generally won’t be able to write-off the depreciation.
Don’t Miss Out on Tax Savings
Figuring out which deductions and credits you’re eligible for in order to lower your tax bill sounds like a dry topic, and it can be. Tax preparation is something you can do on your own, but if you’d rather hand it off to someone else, don’t be afraid to reach out to a tax professional.
If you miss out on your eligible tax write-offs, you might be leaving a lot of income tax money on the table. For example, if you can claim $10,000 worth of car-related deductions and you’re in the 22% tax bracket, that’s $2,200 that you might be able to get back — not too shabby.