What Buying a Car Does for Your Taxes

Buying a car usually doesn’t lower your federal taxes by itself. For most people, costs like the purchase price, loan payments, insurance, and routine maintenance are not deductible. The big exceptions are federal and state incentives for qualifying electric vehicles, deductions tied to itemizing (like sales tax or value-based car taxes), and business-use tax rules that allow depreciation or mileage deductions. Here’s how a new or used car can actually change your tax bill, and what to check before you buy.

The basics: personal vs. business use

For personal-use vehicles, the IRS treats most costs as nondeductible. Your tax picture changes only in specific cases—most notably if you buy a qualifying clean vehicle (which can generate a federal credit), if you itemize and include sales or personal property taxes, or if you use the vehicle for business, medical, or charitable purposes under IRS rules. Employees cannot deduct unreimbursed work mileage through 2025 under current federal law; business owners and contractors can.

Credits you might get when you buy

Federal Clean Vehicle Credit (new EVs and fuel-cell vehicles)

The federal Clean Vehicle Credit (Internal Revenue Code Section 30D) can be worth up to $7,500 on qualifying new electric or fuel-cell vehicles. Starting in 2024, eligible buyers can transfer the credit to a participating dealer at the point of sale to lower the price immediately. The credit is nonrefundable and cannot be carried forward; if you use the point-of-sale transfer but don’t actually qualify (for example, due to income), you’ll have to repay it on your tax return.

To understand whether your purchase might qualify, consider these key eligibility factors:

• Income limits: Modified adjusted gross income must not exceed $300,000 (married filing jointly), $225,000 (head of household), or $150,000 (single) for new vehicles.
• Price caps: Manufacturer’s suggested retail price (MSRP) must not exceed $80,000 for SUVs, vans, and pickups, or $55,000 for other cars.
• Final assembly and battery rules: Final assembly must be in North America, and battery sourcing requirements apply. In 2024, credits were restricted if batteries had components from “foreign entities of concern” (FEOCs); in 2025, these restrictions expanded to certain critical minerals as well. Eligibility varies by model and can change during the year.
• Amount of the credit: Up to $7,500, generally split into $3,750 for meeting critical mineral requirements and $3,750 for meeting battery component requirements.
• Use and reporting: Vehicle must be for your own use (not resale) and primarily used in the United States. Dealers must submit a time-of-sale report to the IRS for credit claims.

Because eligibility depends on income, MSRP, and technical sourcing rules that frequently change, always verify the specific vehicle’s status and your income before entering a contract; the dealer’s time-of-sale report helps, but your return is the final check.

Used Clean Vehicle Credit

A separate credit applies to qualifying used clean vehicles (Section 25E). This is smaller but easier to meet for some buyers.

• Credit amount: The lesser of $4,000 or 30% of the sale price.
• Price cap: The vehicle must be purchased for $25,000 or less from a dealer.
• Income limits: MAGI must not exceed $150,000 (married filing jointly), $112,500 (head of household), or $75,000 (single).
• Eligibility: The vehicle must be at least two model years old, you can’t be the original owner, and you can’t claim this credit more than once every three years.
• Point-of-sale option: Like new EVs, you can transfer the credit to a participating dealer to reduce the up-front price, subject to income verification.

Used credits can help lower-cost EV purchases pencil out, but the dealer and documentation requirements still apply, and income limits are stricter than for new vehicles.

Leasing and the commercial clean vehicle rules

If you lease, the lessor (not you) generally claims a commercial clean vehicle credit and may pass savings through as lower lease payments. This route often bypasses MSRP and buyer-income limits, but you won’t receive the personal Clean Vehicle Credit. Ask the dealer to show how any incentive is applied to your lease.

Home charging equipment (Alternative Fuel Refueling Property Credit)

Installing home EV charging equipment can qualify for a federal credit (Section 30C) equal to 30% of the cost, up to $1,000 for residential property, but starting with 2023 installations it’s only available in designated low‑income or non‑urban census tracts. Businesses have higher per-unit caps. Check your address eligibility before purchasing hardware or scheduling installation.

Deductions that may apply even for non-EVs

State and local sales tax (if you itemize)

If you itemize deductions on Schedule A, you may elect to deduct state and local general sales taxes instead of state income taxes. A car purchase can significantly increase your deductible sales tax amount, subject to the $10,000 federal cap on total state and local tax (SALT) deductions ($5,000 if married filing separately).

• How to claim: Use actual receipts or the IRS sales tax tables plus add the tax you paid on the vehicle as a “major purchase.”
• Timing: You deduct sales tax in the year you pay it. If it’s financed and paid up front, that’s the purchase year; if it’s paid over time, it’s generally deductible as paid.
• Trade-ins and rebates: A trade-in often reduces the taxable base, lowering both the sales tax you pay and any potential deduction. Manufacturer rebates typically reduce the purchase price and can have the same effect.
• Itemizing vs. standard deduction: If you take the standard deduction, you can’t also deduct sales tax.

For most households, the SALT cap and the size of the standard deduction limit the benefit; run the numbers to see if itemizing makes sense in your situation.

Registration and personal property taxes

Some states assess an annual vehicle tax based on value (ad valorem). The portion that is value-based and charged on a yearly basis is generally deductible as a personal property tax on Schedule A if you itemize.

• Deductible portion: Only the value-based, annual component is deductible—not flat fees, title fees, or one-time charges.
• Documentation: Your DMV renewal notice often breaks out the value-based amount.
• SALT cap applies: These taxes count toward the $10,000 SALT limit.

Because states structure fees differently, check your renewal statement to identify which amounts, if any, are deductible.

Interest and insurance on personal cars

Interest on a personal car loan, insurance, and most other ownership costs are not deductible for personal use. If the car is used for business, a portion of these costs may be deductible under business-use rules described below.

Business use changes everything

If you’re self‑employed or own a business, vehicle costs may be deductible when the car is used for business (not commuting). Employees generally cannot deduct unreimbursed vehicle expenses for 2018–2025 under federal law; instead, ask your employer about an accountable reimbursement plan.

Operating costs: standard mileage vs. actual expenses

Business owners can choose between the standard mileage rate or deducting actual expenses (gas/electricity, insurance, maintenance, lease payments, and depreciation when owned). You must choose carefully and keep records.

• Standard mileage rate (2024): 67.0 cents per business mile; 21 cents per mile for medical/moving (moving applies only to active-duty military); 14 cents for charitable. The IRS updates rates annually.
• Actual expenses: Deduct the business-use percentage of total actual costs. Depreciation rules and annual “luxury auto” caps can apply to passenger cars.
• No commuting: Miles from home to your regular workplace are nondeductible commuting miles.
• Recordkeeping: Keep a contemporaneous log (date, destination, purpose, miles) and receipts.

The right method depends on your mileage, vehicle cost, and operating expenses; once you choose actual expenses for a vehicle, switching methods later can be limited.

Depreciation, Section 179, and bonus depreciation

Business owners who buy vehicles may deduct part of the cost via depreciation. Two accelerators are common: Section 179 expensing (subject to annual limits and business income) and bonus depreciation (which is phasing down).

• Section 179: For 2024, the overall expensing limit is $1,220,000 with a phase-out starting at $3,050,000; amounts are indexed annually. A special lower Section 179 cap applies to certain SUVs with a gross vehicle weight rating (GVWR) between 6,000 and 14,000 pounds ($30,500 for 2024). Heavier trucks and vans may qualify for the full Section 179 limit.
• Bonus depreciation: Phases down under current law—60% in 2024, 40% in 2025, 20% in 2026, and 0% thereafter unless Congress extends it.
• Passenger auto caps: Cars under 6,000 lbs GVWR face annual “luxury auto” depreciation caps, even when used 100% for business.
• Business-use percentage: Deductions must be prorated by business use; dropping under 50% business use can trigger recapture.

Plan purchases with your tax advisor to coordinate Section 179, bonus depreciation, and the luxury auto limits—especially for SUVs and mixed-use vehicles.

Mixed-use allocation and documentation

When a car is used for both personal and business purposes, you must allocate expenses and substantiate business use.

• Keep a mileage log showing dates, destinations, business purpose, and miles.
• Retain purchase documents, loan agreements, registration, insurance, and maintenance records.
• Track any reimbursements received; you can’t double-dip.

Good records are essential to support deductions in the event of an IRS inquiry.

Medical and charitable driving

Even for personal vehicles, certain use can be deductible if you itemize:

• Medical travel: You may deduct mileage at the IRS medical rate (21 cents per mile for 2024) plus tolls/parking for qualifying medical care, subject to the 7.5% AGI threshold for medical deductions.
• Charitable service: 14 cents per mile for driving in service of a qualified charity, plus tolls/parking.

These rates are set by law or updated annually; check the IRS’s latest notice for the current year before filing.

State incentives and state tax considerations

States and utilities may offer EV rebates, tax credits, or reduced fees, while some states impose EV-specific registration surcharges. The tax treatment of state or utility rebates varies by program and jurisdiction.

• State EV rebates/credits: Availability and amounts change frequently; some are point-of-sale discounts, others are post-purchase rebates. They may affect your taxable income depending on state and federal rules.
• Property tax credits: A few states/localities offer credits or exemptions for certain vehicles.
• Registration fees: Some states charge extra fees for EVs; these are generally not deductible unless part of a value-based annual tax.

Check your state’s current incentives and how they interact with federal credits and your own tax situation before finalizing a deal.

Practical steps before you buy

Use this checklist to maximize tax benefits and avoid surprises:

• Verify federal EV eligibility (model, battery sourcing, MSRP) and your MAGI against current limits; ask the dealer for the IRS time-of-sale report.
• Decide whether to transfer an EV credit at the point of sale or claim it on your tax return.
• Estimate whether you’ll itemize; if so, gather documentation for sales tax and any value-based registration taxes.
• For business use, choose between standard mileage and actual expense methods and set up a mileage log from day one.
• If buying heavy SUVs/trucks for business, map out Section 179, bonus depreciation, and luxury auto caps.
• Check home charger credit eligibility by census tract before installing equipment.
• Review state/utility incentives and how they affect your net cost and potential tax reporting.

A short planning session—ideally with a tax professional—can help you capture available credits and align your recordkeeping with IRS requirements.

Summary

Buying a car doesn’t automatically reduce your taxes. The main ways a purchase can affect your return are: federal clean vehicle credits for qualifying EVs and fuel-cell cars (including point-of-sale options), itemized deductions for sales tax and value-based vehicle taxes, and robust business-use deductions via mileage, Section 179, depreciation, and bonus depreciation. Most personal costs and loan interest aren’t deductible. Because eligibility rules and dollar limits change, confirm current IRS guidance and state programs—and keep meticulous records—before you buy.

How does buying a car impact your tax return?

You can deduct sales tax on a vehicle purchase, but only the state and local sales tax. You’ll only want to deduct sales tax if you paid more in state and local sales tax than you paid in state and local income tax.

Do I get a tax write off if I buy a car?

Who Can Write Off a Car Purchase? The ability to write off a car purchase on your taxes primarily applies to business owners, self-employed individuals, and independent contractors. To qualify, you must use the vehicle for business purposes, with the amount of the deduction depending on the percentage of business use.

What will give me a bigger tax refund?

If you want a bigger tax refund in 2026, or any other year, you may be able to get it by changing your filing status or claiming credits and deductions you may be missing out on.

Does having a car payment help with taxes?

The Car Loan Interest Deduction allows eligible taxpayers to deduct up to $10,000 in interest paid on qualifying vehicle loans. It applies to new vehicles purchased between January 1, 2025, and December 31, 2028, and only if the vehicle meets specific criteria.