At the moment, a happy driver is one who can save. And an easy way to do this is with tax deductions on vehicle expenses. With the rise of car ownership and gas costs affecting millions of taxpayers this year, it’s in the best interest of every driver to discover the advantages of tax write-offs. But what vehicle expenses are actually tax deductible? And how does owning a car factor in to your deduction?
If you use your vehicle for business purposes, taking a mileage deduction will often give you the greatest reward. You know why? It’s because mileage tracking is both efficient and simple to calculate with the standard mileage rate. For 2022, the standard rate for business miles is 58.5 cents, up 2.5 cents from last year. That is to say, there are other vehicle expenses for you to consider.
On the condition that you have a business car or you use your personal vehicle for business purposes, you may be eligible to deduct car loan interest, parking fees and tolls, and personal property tax. If you’re still unsure whether you qualify, keep reading to see how car loan interest gets factored into your tax deduction.
In short, the answer is no. Most employees cannot deduct car loan interest unless the amount is related to business use. What this means is you must be self-employed, own a small business or use a vehicle for work-related tasks in order to write off the cost. For example, a sales professional who uses his/her personal car to meet with clients may claim a tax deduction for mileage and car loan interest. Of course, this is only the case because sales professionals, like real estate agents, are typically considered independent contractors.
There are two options for deducting vehicle expenses like car loan interest: the standard mileage rate or the actual expense method. It is up to you to determine which deduction method is more beneficial to your tax return. Some years the standard mileage deduction, which includes the average variable costs of driving, will amass the biggest savings. Other years, you’ll find it's more beneficial to calculate the percentage of business-use for gas, depreciation, and other vehicle expenses. Keep in mind, both methods require you to maintain records for tax season.
This is a question we get asked frequently, but the answer is less complicated than you think. Basically, you must separate the time you use your vehicle for personal drives and the time dedicated towards work-related commitments. We’ll give you an example. If you drive your car 60 percent of the time for business, you can deduct 60 percent of the loan interest on your tax return. Many taxpayers miss out on this type of deduction because they are confused or don’t know how to distinguish personal from business use.
The IRS expects sufficient records of your business trips no matter what type of deduction you claim. Apart from receipts and emails, the best way to achieve accuracy is with an automatic mileage tracking app. With MileIQ, you can simply download the app onto your mobile device and begin storing a digital mileage log. Each time you take a trip, you can easily classify your drives as “Personal” or “Business” as you go.
Quick Reminder: Deducting car loan interest is only applicable if you’re a small business owner or self-employed. First, make sure you are eligible to deduct your car loan interest. Next, figure out which deduction method is the best option. Overall, you can’t go wrong with maintaining a mileage log when calculating business expenses for tax season.