How a new car purchase is treated
for income tax purposes will depend on the intended use of the car (business or
personal), as well as on the type of car you bought. Please allow us to
explain further, as there is a quite a bit of information you should know.
If you are using the car for
business (income generating) purposes, such as a self-employment activity like
being an Uber cab driver, or an independent contractor, for example, then
you may be entitled to a tax deduction (called an IRC Section 179 expensing
deduction) for the automobile purchase and any financing charges (but there are lots of rules and
"what ifs" that go along with this). Ongoing expenses, such as
annual costs of operation, can also be tax-deductible as ordinary business
expenses.
The only current and active
federal tax credit of which we are aware however, that applies to purchasing a new car as a non-business vehicle,
is the Alternative Motor Vehicle Credit. This covers only certain purely
electric cars, as well as cars that are powered by hydrogen-oxygen fuel cells.
You can learn more about that
tax credit here, at the following IRS webpages, where the tax credits and
qualifying vehicles are explained:
https://www.irs.gov/businesses/plug-in-electric-vehicle-credit-irc-30-and-irc-30d
https://www.irs.gov/pub/irs-prior/i8910--2010.pdf
There is no direct tax deduction for
vehicle registration fees on a personal tax return. However, if you live
in a state that imposes an excise tax amount, and that is part of the
registration process, then the excise tax can be deducted, but not the whole
amount of the cost of registration.
The legal reasoning is as
follows. The IRS only allows that portion of a state registration fee
that is based on the value of the vehicle to be included toward your
other itemized deductions. Any flat fee portion doesn't count. This
is why there are some 20+ states whose residents can potentially benefit from
the deduction; but the remainder cannot: their states do not charge
vehicle registration fees by value, and instead charge flat fees only.
There is a list of these
qualifying states built-into the TurboTax software. A graphical image of
this chart of states is also shown in one of the screen-capture images at the
bottom of this answer (simply click to enlarge).
If your state is on the list,
then you can enter the vehicle excise tax amount in TurboTax. To do so,
you will want to have your tax return open and locate the Search / Find
box on your screen. Next, type in the exact search string "vehicle
registration fees" and then click on the Jump To link that
should appear beneath. This will take you to the appropriate data entry
place in the program. Please see the screen-capture images below for a
visual illustration of the process.
That said, there may still be
another tax benefit for which you can qualify.
If you live in a state where
you paid sales tax on your new car, and if you also itemize your tax deductions
(on Form 1040, Schedule A) rather than taking the standard deduction, then the
sales tax cost of the car can be separately added to the rest of your sales
taxes paid, in order to calculate your allowable sales tax deduction. So
that could be a tax benefit.
You would find this section,
in TurboTax, among the Deductions & Credits portion of the interview.
Please see the attached screen-capture image for an illustration. You can
also type the words "sales tax car" into the Find / Search
box on your TurboTax screen, and then click the Jump To link that should
appear beneath -- that will take you to the appropriate TurboTax page.
Finally, it is also important
to keep in mind that you (or anyone claiming this deduction) may or may not
actually see any net tax benefit from including these items on your tax
return. The reason for this is that you must have enough itemized
deductions (in total) to exceed the standard deduction available to all taxpayers.
Since more than 2 in 3 taxpayers do not, most people end up taking the (more
valuable) standard deduction, rather than itemizing deductions. If you
input all your data carefully, however, the TurboTax software will make that
determination for you.
As was indicated previously above, unless this is a business vehicle, in which case interest and loan charges paid can be considered as valid business expenses, any finance charges or automobile loan fees are not tax deductible items, unfortunately.
Thanks for asking this question, and please drive safely.
