Buying a car is undeniably expensive. After the transaction is complete, you will need to factor in the costs of taxes, title and registration fees. Of course, you may be wondering, is vehicle sales tax deductible? In some cases, the answer is yes. Learn about vehicle sales tax and what you need to do to claim your deduction.

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What is vehicle sales tax?

All new and used vehicle purchases they are charged a sales tax. Vehicle sales tax is a tax imposed by city and state governments on the purchase of the car. The rate can vary from state to state and in some cases from county to county. Sales tax must usually be paid before you can receive your vehicle’s title and registration.

Who can claim a vehicle sales tax deduction?

Both individuals and a business can claim a vehicle sales tax deduction, but must meet eligibility requirements.

For individuals, to claim the vehicle sales tax deduction, you must:

1. Elaborate deductions. You can’t claim the vehicle sales tax deduction if you use standard deductions.

2. Make sure it is for personal use. For individuals, the vehicles must be for personal use.

3. Choose between state/local income tax or local sales/use taxes. You can choose either:

   1. state or local income tax deduction, or

   2. Local sales and use taxes. You cannot choose to deduct in both categories.

4. Learn about state and local tax caps. Your household can deduct up to $10,000 in sales tax per year. This $10,000 cap includes local, state, property and sales taxes. You will have to choose what to deduce.

For businesses, the following must be met to claim the vehicle sales tax deduction:

1. Must be for commercial use. The vehicle must be used for commercial purposes only, or part of the commercial use must be calculated.

2. Calculate the business expense deduction. Your sales tax on a vehicle used for business purposes can be deducted as a business expense on your tax return. Either deduct the full cost of the vehicle with sales tax in the year of purchase or calculate the depreciation cost over time.

3. Sales tax is deductible for business use only. If the vehicle is used for both personal and business use, you can only deduct part of the sale fee related to business use.

Types of vehicles eligible for the sales tax deduction

According to the Internal Revenue Service, only certain types of vehicles qualify for a sales tax deduction. Vehicles that qualify for a sales deduction are as follows:

• Passenger vehicle. Any vehicle purchased for personal use.

• Trucks or SUVs. Light trucks and similar personal transport vehicles qualify.

• Motorcycles. The deduction includes two-wheelers.

• Recreational vehicles. Caravans, trailers, campers are included as long as they are for personal use.

• Rental vehicles. If you are responsible for paying sales tax as part of the lease, you can deduct the sales tax.

• Boats. Sales tax on the purchase of a boat is deductible as long as it is for personal use.

How to Calculate Vehicle Sales Tax Credit

If you want to calculate your vehicle sales tax deduction, you can do so. Remember to always keep your documentation in case your return could be audited.

Just follow these instructions to calculate your vehicle sales tax deduction:

1. What was the sales tax paid? You can find this information in your sales invoice or purchase agreement.

2. Choose to deduct between income/local tax or income/local tax. You can’t do both.

   • If you choose to deduct sales tax, then you can use IRS Vehicle Sales Tax Deduction Calculator. It will allow you to estimate general sales tax based on income and location,

   • Be sure to add vehicle sales tax on top of this deduction.

3. Stay within the SARE limit. The total deduction for state and local taxes, including vehicle sales tax, is limited to $10,000 per year.

What documents do you need to deduct sales tax on your vehicle?

You need specific documents to claim your vehicle sales tax deduction. Here’s a list:

1. Purchase contract or bill of sale. Either of these documents will list the amount of sales tax that was paid.

2. Dealer receipts. You will need the receipts from the dealership to prove that the purchase and sales tax has been paid.

3. Registration documents. Although not always required, registration documents may state that sales tax has been paid.

4. Proof of payment. Have a canceled check or credit card statement to prove you paid for your vehicle.

5. IRS Schedule A form. To claim the deduction, you must complete Schedule A.

When can you claim a vehicle sales tax deduction?

You can claim a vehicle sales tax deduction in the year the vehicle was purchased. If you purchased the vehicle in 2023, you are eligible for the deduction on your 2023 tax return. Note that the following requirements must still be met:

• You must itemize your deductions

• The vehicle must be for your personal use

• You cannot exceed the SALT limit.

• Choose between state/local income tax or state/local sales tax, but not both

What are the common mistakes to avoid when claiming deductions?

When claiming a vehicle sales tax deduction, be sure to avoid the following mistakes.

1. Not detailing the deductions. A vehicle sales tax deduction can only be used for itemized deductions. Do not use the standard deduction.

2. They don’t keep all the documentation. To claim the deduction, you’ll need to keep several documents, including the sales contract, proof of payment, canceled checks or credit card statements, and in some cases, vehicle registration documents.

3. Using the wrong inference. You must choose between deducting state/local income tax or deducting state/local sales tax. You can’t claim both.

4. Confusion between personal and business uses. If a car is used for business purposes, you cannot claim it as a personal deduction. If the car is split between personal and business use, you can claim the sales tax deduction for the business use only.

5. Ignore state-specific rules. Some states have limits on vehicle sales tax deductions. It’s always good to check your state tax laws.

What is the impact of the vehicle sales tax deduction on other tax credits?

By taking the vehicle sales tax credit, you can reduce or waive other tax credits. Here’s what to consider:

1. You cannot use standard deduction. To claim the vehicle sales tax deduction, you must itemize the deductions. Consider whether taking itemized deductions versus the standard deduction gives you a greater advantage.

2. Using the vehicle sales tax credit can reduce other itemized deductions. Deductions or credits that depend on adjusted gross income may be affected.

3. Taxpayers with high incomes can use alternative minimum tax. The AMT does not allow a vehicle sales tax deduction.

4. Taking the vehicle sales tax deduction can reduce your taxable income. Lower taxable income means you may be eligible for an Earned Income Tax Credit or American Opportunity Tax Credit.

State-specific rules for deducting vehicle sales tax

States also have their own specific rules governing vehicle sales tax deductions. Here are some state-specific rules to be aware of when claiming a vehicle sales tax deduction:

1. Some states have no sales tax. These states are Alaska, Delaware, Montana, New Hampshire, and Oregon. Because sales tax isn’t charged, you can’t deduct it on your tax return.

2. Certain states have additional local taxes. In some states, you’ll pay a county- or city-specific sales tax. This will increase the amount of sales tax you pay. To find out if your state has a specific county or city state tax, visit state and local tax rates.

3. Credits or rebates for hybrid and electric vehicles. Check to see if your state offers special rebates or credits for hybrid and electric cars. This could affect your deduction.

4. Some states will have low or variable sales tax rates. Some states have a lower sales tax rate for vehicles than the general state tax rate. Double-check this information before you decide to deduct your sales tax.

Frequently asked questions about vehicle sales tax deductions

• Can I claim the vehicle sales tax deduction if I claim a standard deduction?

• Is there a cap on the vehicle sales tax deduction?

• When can I claim the vehicle sales tax deduction?

This article originally appeared on GOBankingRates.com: Is vehicle sales tax deductible? What you need to know