You can write off the sales tax you paid on a new car purchase on your federal taxes, but you must itemize deductions to do so. That means you cannot use Form 1040EZ, which allows you to take only the standard deduction; you must use Form 1040 instead, which is somewhat longer. You may also be able to write off the sales tax on your state tax return, further lowering your income tax liability.
Step 1 – Indicate that you wish to deduct general sales tax payments on your federal tax return. Tell your accountant or look for this option in your tax preparation software. Check the box under the “Taxes You Paid” section of Schedule A if you are filling out tax forms directly.
Step 2 – Look up your state in the IRS “Optional State and Certain Local Sales Tax Tables.” Find your area’s general sales tax rate to the right of the state name.
Step 3 – Compare the sales tax percentage you paid on your new vehicle to your state’s general sales tax rate. The general sales tax rate is the maximum amount of sales tax you can deduct, even if the actual rate you paid is higher. Multiply the retail price of your new vehicle by your state’s general sales tax rate to determine your allowed deduction. Remember to convert the sales tax percentage into a decimal form. For example, if your state has a 5 percent tax rate, multiply the retail cost of the car by 0.05.
Step 4 – Add the maximum amount of sales tax you are allowed to deduct for your car to the amount of sales tax you paid throughout the previous year on other items, such as books, food and furniture. This is your total sales tax deduction.
Step 5 – Enter your total sales tax deduction on your tax return. Provide this figure to your accountant or enter it in the appropriate field if you’re using tax preparation software. Enter it on Schedule A if you’re preparing your tax forms directly.
Step 6 – Review the instructions for your state income tax return or consult an accountant to determine the process for writing off the sales tax on your new vehicle on your state income taxes.