The end of the year is fast approaching, but there is still time to take advantage of many car-related tax credits and deductions. Gather up your records and check these seven smart moves you can make now that could lower your tax bill.
1. Gather Vehicle-Related Receipts
Round up sales slips, account statements, canceled checks and other receipts for expenses related to your car or truck. Some of these expenses may be tax-deductible if you drove your vehicle for business or employment reasons, to volunteer for a charitable organization or for certain medical reasons.
Eligible expenses could include gas, oil changes, tire purchases, maintenance, repairs, parking fees, tolls and even depreciation, which is based on the cost of the vehicle.
Save the documentation for any annual vehicle registration fees, too. If the fee is considered a tax, you may qualify for a tax deduction based on the amount you paid. In general, annual state and local taxes for personal property, such as a car or truck, may be deducted from your federal return if they are charged based on the value of the property.
2. Update Your Mileage Log
In addition to getting your expense records in order, you should also have records of the miles you drive, especially if they are for business, volunteer or medical reasons. A daily mileage log doesn't have to be complicated. It could be as simple as your appointment calendar or a small spiral notebook kept in your glovebox. If you prefer to go paperless, there are also tax-oriented mileage-tracking apps that allow you to export your data to a spreadsheet or e-mail it to your tax professional.
You would need to note a description of the relevant places to which you traveled in your vehicle, including the miles driven, odometer readings, destination and business purpose. This is a good place to note other expenses related to a trip as well, such as parking fees or tolls. Finally, the log should record the odometer readings on the first and last days of the year. To corroborate your mileage log, save the paperwork whenever you visit an auto repair shop, making sure the odometer readings on your receipts match up to the mileage you've reported.
3. Submit Reimbursements
Once you've gathered your vehicle-related receipts and mileage log, you may determine that a third party owes you money for some of your expenses. For example, an employer may need to reimburse you for travel expenses. Or a nonprofit organization may have promised to reimburse you for volunteer miles you drove. If you participate in a Flexible Spending Arrangement (FSA) program at work, you could be reimbursed for miles driven to and from medical facilities and pharmacies.
This is also a good time to submit any outstanding receipts to be reimbursed. If you are not repaid, some of those out-of-pocket costs may be tax-deductible. Either way, you will need your records to prove the expense.
4. Consider Donating an Old Car
If you have a used vehicle that you plan to get rid of this year, consider giving it away to a nonprofit organization. You could get a tax deduction while also supporting a good cause, as long as the organization to which you donate the vehicle is an IRS-qualified charity.
The actual tax benefit depends on what the charity does with the car or truck. If the charity sells it, which is likely, your deduction is based on the sale price, says Howard Rosen, a certified public accountant in St. Louis. "If we assume you're in a 25 percent tax bracket, your savings is equal to 25 percent of what they actually sell the car for," he says.
You may be able to sell the vehicle on your own for a larger amount, donate those proceeds to charity and score a bigger deduction, Rosen says. Before handing over the keys, determine if donating a car makes sense for your financial situation.
5. Create a Good Storage Area for Records
Keep your existing paperwork in an organized storage system that you can easily access in the future. Even after you file your taxes, you will need to keep supporting documents on hand for several years.
According to the IRS, you should keep receipts and other paperwork that support tax deductions and income for three years from the date you file the income tax return. (If you file early, the return is considered filed on the due date). However, there may be situations in which you have to keep records longer, or even indefinitely. Make sure the papers don't get lost after you file your taxes.
You can also store documents electronically. Best practices for online storage include keeping your files on an encrypted drive and creating a backup drive of your data.
6. Buy a New Car or Truck for Your Business
If you are self-employed or own your own company, you may be able to write off the purchase price of a car or truck this year using a Section 179 deduction. The purchased vehicle must be placed in service before the end of the year. Once it's placed in service, it should also be used for business more than 50 percent of the time.
"If you were going to buy a car in the first quarter of next year, buy it now," Rosen says. "You can write off a good chunk of that car this year. Why not get the deduction now as opposed to a year from now?"
The actual amount of the deduction varies, based on the percentage of time the vehicle is used for business, the vehicle's price and your business income. There are also certain limits on passenger cars, and there is a larger tax benefit if you purchase a "heavy" passenger vehicle, such as an SUV, that is rated at more than 6,000 pounds gross vehicle weight but less than 14,000 pounds.
You could check prices for a new car or truck now to prepare your budget, but talk to a tax expert before making a final purchase decision.
7. Call Your Tax Professional
Get advice from a tax professional before you make any important tax-related decisions. He or she can help you avoid financial mistakes. For example, some expenses may not be deductible unless you itemize them on your tax return instead of using the standard deduction offered to some taxpayers. But itemizing may not be the best decision if the total amount of money saved is less than the standard deduction. A tax expert can look at your individual situation and help you decide the best course of action.
In the midst of everything else you do in the holiday season, now is the time to get your auto-related paperwork in order and start making year-end tax decisions. By following these seven steps, you can help ensure that you get each vehicle-related tax benefit possible.
