In the U.S., the tax filing deadline is a little more than a week away. If you’re one of those people who waits until the last minute, here’s how your car might figure into that.
I help people buy cars every day and they often ask how they can use their vehicle to reduce their tax burden. I’m not a tax professional, but I got some answers from someone who is that will hopefully keep some money in your pocket this season.
Lisa Najim is an Enrolled Agent and CEO of The Jersey Tax Place with an additional office in Wisconsin. She has been helping folks with their taxes since 1990 and makes my tax filings much less stressful. Full disclosure, she also does my taxes, but she’s a pro and she agreed to talk to Jalopnik about cars and taxes.
I asked Lisa for some tips for folks that want to use their vehicle as a deduction.
This interview has been edited and condensed.
Does everyone get a deduction for their vehicle? Or do only certain people qualify depending on their work situation?
Lisa Najim - The most important thing is people should keep a log of the miles and business purpose!
You can definitely say “your mileage may vary,” because the rules are a little different if you are an employee vs. self-employed, and they are different if the vehicle is not a regular passenger vehicle. Examples: you own a taxi, a school bus, an ambulance, a box truck or a converted work van. More than nine passengers or no passengers in the back matters. More than six feet of cargo space matters. The weight of vehicle matters like those really big SUVs, and trucks.
If you are an employee, there is no deduction for commuting, no matter how far away it is. Commuting is back and forth to your regular job at the regular location. If you don’t work at the same place all the time, but you normally work in a certain area (within the city limits, within the county, etc) that will be commuting. If you then go out of that area it becomes deductible. An example is a union electrician who usually works within Atlantic County, New Jersey, but now is sent to a job in NYC.
For employees or self-employed who have home offices, there is no commuting, their qualified mileage starts in the driveway because their regular work location is at their home office.
What are some common deductions that you find a lot of folks are overlooking?
LN- People who use their vehicles occasionally for work often don’t realize they may have a deduction. For instance, the person who has to go to the bank and the post office. Or if you are assigned to a temporary work location, all the miles to there and back are deductible.
It doesn’t matter if that temp location is further away, closer to, or right next door to your normal location. Also, if your job has a number of locations and you need to go to the different locations during your work day, you can deduct those expenses as well.
Can you give a quick explanation on the standard mileage deduction vs. actual expenses, and perhaps when it would be advantageous to use one or the other?
LN- You should use whichever one is larger. With either one, you keep track of miles in order to determine the percent of business use. If you are doing mileage, you may be able to take an additional deduction for tolls, parking, and interest on the vehicle loan in addition to standard mileage rate.
If you want to claim actual costs, you must keep track of miles so that the percentage of business use can be determined and also every other expense of the vehicle. Gas, insurance, garaging, washing, repairs, maintenance, title, personal property tax (in some states), etc.
Some items are deductible even if you don’t use the vehicle for business, such as personal property tax in the states that have that.
What are some common misconceptions about using your vehicle as a deduction? I know a lot of people think their lease payments can be written off, but in order to do so, you have to fall within certain parameters.
LN- There is a limitation of both the amount of a lease that you can deduct and the amount of depreciation you can take on a purchased vehicle.
For a lease, the calculation is called “lease inclusion amount.” Basically, it’s the cost of the car that can be written off. It is about $23,000, but it does change. Cars are a five-year property.
When you are looking at the chart on the IRS website, you can see that you can get a car, but not a luxury car. So, the inclusion amount for a lease will be broken back to that $23,000 or so that you get from a purchase.
One exception: if you leased or purchase one of those big SUVs or trucks over 6,000 lbs., then you are not limited by the $23,000 amount.
Are there any vehicle deductions that would raise a red flag with the IRS?
LN- If the vehicle is a regular personal use type vehicle, it is unusual to have it for 100 percent business use. Sometimes people don’t realize how many miles they are really claiming, and they come up with an amount that seems unreasonable. It might be the right number, but that’s when you really want that log to back it up. So if you drive 50,000 miles for business, that might be true, but it is really a lot of miles, and it might be questioned.
As long as you have records, it should not be a problem. On the other hand, just because it felt like 50,000 miles, it won’t fly.
The IRS does use the information about your occupation to compare your expenses to those of others with similar job titles. They call this a DIF score. So if your miles or other expenses are much higher than usual for your profession, you may need to verify the information you gave.
Lisa highly recommends that people visit the IRS.gov website to clarification on how various deductions work in order to understand what counts and what doesn’t.
Good luck this tax season.