It’s always a good feeling when you can lower your tax burden. One way that may be open to you is through a vehicle sales tax credit. Since a car, boat, or other vehicle is a significant expense, the amount of tax credit could potentially erase your tax payment.
However, you need to qualify to receive the credit, so take care in the choices you make when filling out your tax forms. This post tells you what you need to do to be eligible for this credit, and some other things to think about before committing to it.
Deductions vs. Credits
The first thing to get straight is the difference between a tax deduction and a tax credit.
A deduction reduces the amount of income you are taxed on. For example, if your income is $60,000 and you have deductions worth $5,000, your taxable income is $55,000. Your taxable income is lower than your unadjusted income; therefore, you have less income to pay tax on.
A credit reduces the amount of your tax debt. It has nothing to do with your income. In this example, you have calculated that you owe $5,000 in income tax. However, you find you are eligible for a tax credit of $2,000. Your tax bill is lowered to $3,000.
Tax credits and deductions are available at the federal and state level. To find out information about state tax incentives for things like electric vehicles, go to the US Department of Energy Alternative Fuel Data Center for a list.
The vehicle sales tax deduction is available for a range of vehicles. You can deduct the sales tax for automobiles that run on gas, electric, or are hybrids. Or you can qualify for this sales tax credit for:
- Motor homes
Keep all receipts, so you have them at tax time.
How to Qualify for and Claim a Vehicle Sales Tax Deduction
You must itemize to consider doing this. To qualify for the deduction, the following applies.
- It’s only for new vehicle purchases, not used or leased. (If you lease a car, the dealer receives the tax deduction, although some will give part of it to you as a customer retention tactic.)
- The sales tax paid must be at the same rate as the general sales tax rates. If this is not true, you may take only a general sales tax deduction.
- You can take the vehicle sales tax deduction or the general sales tax deduction. You can’t have both.
To find your potential general sales tax deduction, you need to have kept all your receipts for the tax year. Your other choice is to base your deduction using the IRS sales tax tables. Remember that those tables are based on income, not potential sales tax amounts.
The table allows you to calculate an estimated sales tax paid, but the tables do not include large purchases, such as vehicles. To get the true picture, you need to add the sales tax you paid for your car or other eligible vehicles.
To claim the vehicle sales tax deduction, you need to consider whether itemizing provides the best tax deal for you, or if you would be better off taking the standard deduction.
If you decide to itemize, do so based on how you use the vehicle.
- If the vehicle is primarily for personal use, file Form 1040 Schedule A on your personal income taxes.
- If the vehicle is primarily for business us, file Form 1040 Schedule C for your business income.
Again, you can’t do both - sorry!
There are limits on how much you can claim when you itemize for tax deductions. The following applies from 2018 through 2025:
- The limit is $10,000 for the total amount claimed for real property taxes, personal property taxes, state and local income taxes, and the general sales tax (if that’s what you elected).
- If you are Married Filing Separately (MFS), the limit is $5,000.
As we mentioned above, the general sales tax does not necessarily include the vehicle sales tax, especially if you use the IRS tables to estimate.
Scenarios for Vehicle Sales Tax Deductions
There are so many ways to acquire a vehicle. It can confuse anyone on whether or not you qualify for the tax deduction. Here's a general round-up.
If the Vehicle Is Financed
You can deduct the sales tax on vehicles you buy whether you pay the full amount at the time of purchase or finance the cost, rolling the sales tax in. The tax is charged to you the year you buy the vehicle, even if you spread payments out over many years.
You cannot take the deduction throughout the life of the loan, only in the year the vehicle was purchased.
If You Had a Trade-In
Your eligibility for the tax deduction or any state or local incentives varies from state to state.
Sales tax depends on the local and state sales tax rates. The taxable sale price may be calculated before or after the trade-in allowance is subtracted.
- In 42 states, the sales tax is paid on the new vehicle's value after the trade-in is subtracted.
- Oregon has no sales tax, so if you buy a vehicle there, you pay no taxes anyway, so you have nothing to use for a deduction.
- In California, Hawaii, Kentucky, Maryland, Michigan, Maine, and Virginia, you pay sales tax on the vehicle's full value, no matter if you receive a trade-in allowance.
As always, tax regulations can change. Always check with the IRS and your state and local taxing agencies before doing your taxes.
You Buy the Vehicle in a Different State from Your Own
Maybe you live near another state's border, or you decide to travel elsewhere to make a vehicle purchase. Which state gets the sales tax, and can you get the incentive?
The laws differ for each state, so you should always ask the dealer or the taxing agencies where the taxes go. You need to know this to avoid a potential charge of tax evasion. Often the dealer collects the sales tax and sends it to the correct agency in your state, but you should confirm that before buying.
Also, make sure the sales tax was paid before registering your new vehicle at the state DMV. Most of the time, the tax charged to out of state vehicle purchases is the same as in-state. If the amounts do not match, however, you are responsible for paying any shortage.
Rebates and Dealer Incentives
Rebates and incentives are given to reduce the vehicle price. Unfortunately, most states charge sales tax according to the vehicle's full price before rebates and incentives. Crummy buttons, but there you have it.
The vehicle sales tax deduction is available for a variety of vehicles. The vehicle must be purchased new; it cannot be leased or used.
A deduction reduces your total income, so you pay less income tax, unlike a credit that reduces the amount of tax you pay.
You have to itemize to claim the deduction. You may find it more advantageous to claim the general sales tax deduction, so run the numbers for both.
Happy vehicle hunting!