Is Vehicle Sales Tax Deductible? What You Need To Know

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All new and used vehicle purchases are charged a sales tax. The vehicle sales tax is a tax imposed by city and state governments on the purchase of the car. The rate can vary from state to state and in some instances from county to county. Usually the sales tax has to be paid before you can receive title and registration to your vehicle. 

Sometimes, you can deduct the sales tax of your vehicle from your taxes. Here’s what you need to know.

Who Can Claim a Vehicle Sales Tax Deduction?

Both individuals and a business can claim a vehicle sales tax deduction, but they must meet eligibility requirements. 

For Individuals 

1. Itemize your deductions. You cannot apply the vehicle’s sales tax deduction if you’re using standard deductions. 
2. Ensure it’s for personal use. For individuals, the vehicles must be for personal use. 
3. Make a choice between state/local income tax or local sales/use taxes. You can choose either:
   1. State or local income tax deduction, or
   2. Local sales and use taxes. You cannot choose to deduct in both categories. 
4. Meet the state and local tax cap. Your household can deduct up to $10,000 of sales tax per year. This $10,000 cap includes local, state, property and sales taxes. You’ll have to make a choice of what to deduct. 

For Businesses

1. Must be for business use. The vehicle must be used for business purposes only or a portion of the business use must be calculated. 
2. Calculate the business expense deduction. Your sales tax on a vehicle used for business purposes can be deducted as a business expense on your tax return. Either deduct the full vehicle cost with sales tax in the year purchased or calculate the depreciation cost over time.
3. Can only deduct sales tax for business use only. If the vehicle is used for both personal and business uses, you can only deduct the portion of the sales tax related to the business use. 

What Types of Vehicles Qualify?

According to the IRS, only certain types of vehicles qualify for a sales tax deduction. This includes:

• Passenger vehicle, trucks or SUVs. Any vehicle bought for personal use.
• Motorcycles
• Recreational vehicles. Campers, trailers motorhomes are included as long as it is for personal use. 
• Leased vehicles. If you’re responsible for paying the sales tax as a part of your lease agreement, you can deduct the sales tax. 
• Boats

How To Calculate Your Vehicle Sales Tax Deduction 

Follow these guidelines to calculate your vehicle sales tax deduction: 

1. Find the amount of sales tax you paid. You can find this information on your bill of sale or purchase agreement. 
2. Choose to deduct between income/local tax or income/locals sales tax. You can’t do both.
   • If you’re choosing to deduct sales tax, then you can use the IRS Vehicle Sales Tax Deduction calculator. It will allow you to estimate general sales tax based on income and location, 
   • Make sure you add the vehicle sales tax on top of this deduction. 
3. Stay within the SALT cap. The total deduction for state and local taxes, including vehicle sales tax, is capped at $10,000 per year.

What Documents Do You Need for Your Vehicle’s Sales Tax Deduction?

You need specific documents to claim your vehicle’s sales tax deduction: 

1. Purchase agreement or bill of sale. Either of these documents will list the sales tax amount that was paid. 
2. Dealership receipts. You will need the receipts from the dealership to prove that the purchase and sales tax were paid. 
3. Registration documents. While not always required, the registration documents can provide that the sales tax was paid. 
4. Proof of payment. Have a canceled check or credit card statement to show that you paid for your vehicle. 
5. IRS Schedule A form. To claim the deduction, you need to fill out Schedule A. 

When Can You Claim Your Vehicle Sales Tax Deduction? 

You can claim your vehicle sales tax deduction in the year the vehicle was purchased. If you purchased the vehicle in 2023, you are eligible for the deduction on your 2023 tax return.

What are Common Mistakes to Avoid When Claiming Deductions?

When claiming a vehicle sales tax deduction, make sure you avoid the following mistakes. 

1. Not itemizing deductions.  A vehicle sales tax deduction can only be used for itemized deductions. Do not use the standard deduction. 
2. Not keeping all the documentation. To qualify for the deduction you will need to keep several documents including your purchase of sale agreement, proof of payment, canceled checks or credit card statement and, in some cases, your vehicle registration documents.
3. Using the wrong deduction. You must choose between state/local income tax deduction or state/local sales tax deduction. You can’t claim both.  
4. Confusing personal and business uses. If a car is used for business purposes, you cannot claim it as a personal deduction. If the car is split between personal and business use, you can only claim the sales tax deduction on the business use only.
5. Not paying attention to state specific rules. Some states have caps on vehicle sales tax deductions. It’s always good to check your state tax laws. 

How This Deduction Affects Other Tax Credits

By applying the vehicle sales tax deduction, you may reduce or forego other tax credits. Here’s what you need to consider:

1. Taking the vehicle sales tax deduction may decrease your taxable income. Decreasing your taxable income means you may be eligible for an earned income tax credit or an American opportunity tax credit.
2. You cannot use the standard deduction. If you don’t qualify for a lot of deductions, not taking the standard deduction could mean you pay more in taxes
3. If you use the alternative minimum tax, you can’t also use the vehicle sales tax deduction.

State Rules for Vehicle Sales Tax Deductions

States also have their specific rules governing vehicle sales tax deductions. Here are some state-specific rules to be aware of when claiming a vehicle sales tax deduction:

1. Some states do not have sales tax. These states are Alaska, Delaware, Montana, New Hampshire and Oregon. Since sales tax isn’t being charged, you can’t deduct it on your tax return. 
2. Certain states have local sales tax additions. In some states, you will pay a county or city specific sales tax. This will increase the amount of sales tax you pay. To find if your state has a county or city specific state tax, visit state and local tax rates.
3. Hybrid and electric vehicle credits or rebates. Check if your state gives special rebates or credits on hybrid and electrical cars. This could impact your deduction. 
4. Some states will have low or variable sales tax rates. Some states have a lower sales tax rate on vehicles than the general state tax rate. Double-check this information before you decide to deduct your sales tax. 

The Bottom Line

If you can deduct your vehicle sales tax on your taxes, make sure you’re not giving up other tax credits that could be more beneficial.

Working with a tax professional can help you make sure that you are getting all of the deductions that you qualify for and getting the biggest refund possible.

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