Deducting Car Sales Tax

Buying a new car involves one unappealing aspect in most states: you have to pay sales tax on top of the car price. However, federal tax law allows a deduction for sales tax paid. So it pays to keep your paperwork at least through the end of the year and attach it to your tax files. The steps to claiming the deduction are easy, as detailed below, but it's always a good idea to check your deduction approach with a certified tax professional or attorney before filing.

Step 1

Locate the final purchase documents associated with your car purchase. Review the paperwork and find the sales tax figure you paid along with the purchase price of the car. Write this figure down separately. Confirm that the date on the documents occurred in the same tax year that you plan to claim the deduction.

Step 2

Obtain a copy of IRS form 1040 or 1040A, along with the respective guideline book that provides the IRS instructions. Fill out your tax forms and selected itemized deductions rather than taking the standard deduction. Fill out IRS Form Schedule A, Itemized Deductions. Complete the form with any other deductions you have.

Step 3

Double check the instruction for Form Schedule A to make sure all your deductions can be included, especially your sales tax entry for your new car. Flip the form over or use page two of Schedule A, depending how it was printed. Fill out the information that identifies the vehicle that your deduction is based on. Finalize the form and attach it to your IRS Form 1040 or 1040A.

Step 4

Fill out the rest of your Form 1040 or 1040A until you reach the summary total of all your deductions. Continue to use your itemized deductions if they exceed the standard deduction. Use the standard deduction if your worksheet comes out to a lesser total. Calculate your taxes owed with the rest of 1040 or 1040A form after your deductions are applied to your taxable income figures. Provide your address or bank account number if a refund is owed to you. Finish the form and sign it. Mail it in to the IRS with a check payment if taxes are owed.

Tips and Warnings

You can still get a tax deduction on a used a car if you donate it to a licensed charitable organization. If you do so, make sure to save all your paperwork and receipts of the donation to prove that the car was actually donated.

You cannot claim a tax loss on a used vehicle just because didn't sell at the price you preferred. The same warning generally applies to other personal property sold in a tax year as well. However, taxes do apply if you sell the car or property for more than the amount you paid. The net profit would be considered taxable income.

Sources
Bankrate: Deducting Sales Tax on a New Car [http://www.bankrate.com/finance/taxes/writing-off-the-taxes-on-your-new-car-1.aspx]

Kiplinger's Finance: New Car Sales-Tax Deduction [http://www.kiplinger.com/magazine/archives/2009/05/new-car-tax-write-off.html]

Intellichoice: Smart Buying Essentials - Unloading Your Old Car [http://www.intellichoice.com/carBuying101/UnloadingOldCa]