When can I Take a Car Deduction?

There are many ways you can take a car deduction when you file your income tax return in the United States. The most common car deduction is for the business use of a personal car, such as salesmen driving their cars on business appointments. Other car deductions are available, though, such as for the use of your personal car for charitable or medical purposes. You may also be able to deduct the cost of driving your car to your new residence when you move, if you meet the distance limitation. Special tax preferences for certain car purchases are sometimes enacted as well.

Individual taxpayers can take car deductions on their personal returns, both on Schedule A or Schedule C, as appropriate. Non-reimbursed business use of your car for your employer’s business, as well as charitable and medical use, are reported on Schedule A; Schedule C is used only to report the use of your car for your own business.

A car deduction can reflect the actual costs of the car, pro-rated between personal and business use; the alternative is to claim a flat-rate mileage deduction. The amount of the business mileage deduction varies annually; for instance, for 2009 taxes, the rate was $0.52 US Dollars (USD) per mile, and decreased to $0.50 USD per mile for 2010 taxes. Thus, if you drove 1,000 miles on business in 2010 and weren’t reimbursed for them by your employer, you were entitled to a deduction of $500 when you filed your 2010 tax return.

Some taxpayers elect to deduct the actual costs of operating the car. When this is done, all the costs of operating the car, including gas, maintenance and insurance, are pro-rated between personal and business, medical and charitable use. Taxpayers who deduct actual car expenses may also take a deduction for the depreciation of their car’s value, but must then declare a taxable profit if they later sell the car for more than the depreciated value.

The rules for deducting the costs of medical, charitable and moving use of your car are similar, but the rates are much lower. Charitable use of a car refers to trips made primarily for charitable purposes, such as bringing donated items to a charity auction. Medical use refers to trips whose primary purpose is obtaining medical care for the taxpayer or her dependents. A car deduction in connection with changing residence is more involved. The taxper's new residence must be at least 50 miles further from her former residence than her former residence is from her place of employment.

If a taxpayer donates her used car to charity, she can take a deduction as well, but certain rules apply. Most cars donated to charity are inoperable and worth only their scrap value, but some taxpayers have tried to defraud the IRS by claiming a larger deduction than warranted. This resulted in a ruling that the taxpayer can only take a deduction for the actual amount the charity receives when it sells the car, which is what most charities do with the cars donated to them.

In its efforts to promote certain commercial behavior, the U.S. Congress also enacts short-term tax incentives relative to automobile purchases. The sales taxes paid relative to the purchase of certain new cars in 2009, for example, were deductible on taxpayers’ federal tax returns for that year. The purchase of fuel-efficient cars, as well as those that use alternative energy sources or hybrid sources, may also make the purchaser eligible for tax deductions or credits. Since these incentives are short-term and change annually, the IRS should be consulted for the most up-to-date information.


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