Your Car And Income Tax Season: Are They Related?

by Don Elliott on April 4, 2012

Tax RefundsFor some people, their income tax refund provides the only time all year when they can amass enough cash for a down payment on a new or used car. Unfortunately, for most of us, the amount of the tax refund is a big surprise rather than a planned event. This makes budgeting for cars, payments, and auto repairs difficult.

In 2011, the average income tax return was $2,913! Towards the purchase of a car, that is a significant down payment. Car dealers are well aware of the influx of cash and go out of their way to make it as easy as the law will permit for you to apply your tax refund towards the purchase of one of their cars. New rules apply to tax preparation, preventing car dealers from taking advantage of unsuspecting car shoppers by preparing their taxes for them. However, most car dealers have studied the tax changes and know exactly what they can do to “help” you spend that tax refund.

Besides the tax refund, check your car expenses to see if it provides ways to pay less sales tax. For example, if you bought a car in 2010 and itemize your deductions, the sales tax that you paid for that car may boost your sales tax deduction over the standard deductible amount for sales tax. For example, the sales tax on a $30,000 car could be $3,000 or more.

The standard mileage deduction for business and medical use of your car went up in 2011. For the first half of the year, business use mileage was $.51 per mile and the medical use deduction was $.19 per mile. During the second half of the year, the deduction increased to $.555 and $.235 respectively. The deduction for charitable use of your car remained at $.14 for the entire year.

The rules concerning capital gains when you sell your car are fairly complicated. Cars used for business factor depreciation and use costs to determine taxes owed. For personal use, unless your car was antique or highly collectible, capital gains are not an issue.

Donating your car to charity is another way to use the value locked into your car for a tax advantage. If you donated your car to a charity in 2011, you can deduct the gross amount obtained by the charity when they sold your car from your taxes. Lots of rules apply here, but donation can provide one last chance for that older car to put some money back in your pocket.

If you were fortunate to buy a new plug in electric car (like the 2012 Chevy Volt) in 2011, you may qualify for a $7,500 deduction. You might also be able to deduct up to 50% of the costs related to the installation of the charging station. If you didn’t get any tax deductions or refunds, you can always get an auto loan to help pay for your car.

As we always do with tax suggestions, we strongly advise that you consult with your tax adviser for the facts about your car and your own personal tax situation. We only point out here that there might be some extra used car value hidden in the car out in the driveway!

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