In the early days of the pandemic, car buyers slowed their purchases due to the uncertainty of the times or the fact that working from home meant less driving. The result of the past two years has been an automotive industry that was hit hard by supply and demand issues - first by shutdowns, and then by microchipping shortages. As commuting to the office resumes, you might be considering purchasing a car – and if you use it for business or personal use – whether you can make that purchase tax deductible. Here’s what to know.
The average price for a new car hit just over $47,000 in December 2021 according to Kelley Blue Book. While that number would have seemed unfathomable just a few years ago, the pandemic and supply chain issues only exacerbated the problem leading to rapid price increases. In 2019, the average car price in the U.S. rose by about $1,800; by 2021, that number rose to about $6,200.
Buying new or used?
While prices are slowly decreasing from their December peak, it’s an expensive time to buy a big ticket item like a car - even if it’s used. The average price of a used car – of which there’s more supply than new – still rose 29% year over year as of January 2022. Buying a new car may not be the best financial decision due to depreciation, but even buying a used car means factoring in things like insurance, warranties, and possible loan payments. If you absolutely can’t wait to buy a car, make sure to research as much as you can to find an affordable option.
What is tax deductible for vehicles?
While you can’t write off the entirety of the purchase price for a new or used vehicle, unless you own and operate a business, you do have options available for tax purposes. Here are a few examples.
Vehicle Sales Tax
If you itemize, you can take either the income tax deduction or a general sales tax deduction, but you can’t take both. The vehicle sales tax is added to the sales tax deduction. You’ll also have to consider whether itemizing or taking the standard deduction results in a greater tax benefit to you - this should be discussed with your tax and financial advisors.
Standard Mileage Rates
You can deduct standard mileage rates if your car is used for business, charitable, medical, or moving purposes. The following are the standard mileage rates for 2022:
- 58.5 cents per mile driven for business use
- 18 cents per mile driven for medical, or moving purposes for qualified active-duty members of the Armed Forces
- 14 cents per mile driven in service of charitable organizations.
Actual Car Expenses
If you don’t use the standard mileage rate, you may be able to deduct actual car expenses, which include things like depreciation, registration fees, repairs, parking fees, and more. If your car usage is split between business and personal use, you can only deduct that portion which is used for business purposes.
Purchasing Vehicles in 2022
There are many tax considerations when buying a new or used car, either for business or personal use. If you’re considering purchasing a vehicle in 2022 and have questions about the tax implications, deductions, or credits for vehicles in California, contact us. We can discuss your options and figure out the best path for tax savings in your car-buying experience.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.