January 25, 2013
As usual, there is not a straight yes or no answer when it comes to claiming car loan interest on your taxes. Yes, you can claim it, but you must be able to fit it into a category that allows tax-deductible interest to do so. The IRS also has issued tax incentives in the past to help car buying be more affordable and boost sales for the auto industry. The most recent incentives are the new car credit and green car tax credit. Check with your state before buying a vehicle as some incentives may be available to you.
Many conclude that because mortgage interest and student loan interest is deductible that auto loan interest is as well. The categories being a business expense, mortgage or home equity payments, student loan payments, business loan payments, and some personal loan payments. Fitting into each category can be tricky though and each has its risks and rewards. Weighing those is up to you. The rewards are obvious as you pay less to the government and car loans become more affordable, but sometime the rewards outweigh the risks depending on your situation. Deducting auto loan interest on your taxes can send a red flag to the IRS and can result in fines and fees so make sure you are legitimately claiming the auto interest if you choose to do so.
Home Equity Loan or HELOC (home equity line of credit) Category: Using the money from a HELOC to finance a vehicle allows you to fit into this category for interest deductibles. However, if you are unable to pay the car payment the house, not the car, is the first thing to be taken away.
Business Loan: Using your vehicle as a business expense also allows you to deduct your auto loan interest from your taxes. However, you must be able to prove how the vehicle applies to the business and have a log of mileage and clients taken in the vehicle for the business. Most of the time claiming a vehicle requires a business license as well.
Personal Loans: If you have personal loans out in your name than you are not eligible for an auto loan interest deduction.
Some states allow you to deduce vehicle registrations on your taxes. These states are Alabama, Arizona, California, Colorado, Georgia, Indiana, Iowa, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, South Carolina, Washington, and Wyoming
When you go to file your taxes you will need to use a 1040 form and know that not all will be accepted by the IRS. Other than the 1040 form the IRS requires the below:
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