Deducting car loan interest
One way to recover some money during tax season is through tax deductions, which are reductions of income that are able to be taxed and are commonly a result of expenses. There are many types of tax deductions, one of which is car loan interest.
What is car loan interest?
When people purchase a vehicle, they often finance much of the cost through an auto loan. That means that they are given the vehicle right away, but allowed to pay for it in small sums over time. This convenience usually comes with the need to pay interest, which is the fee for borrowing money from a lender.
Is car loan interest tax-deductible?
Unless you meet certain requirements, most taxpayers can’t deduct car loan interest.
When car loan interest is deductible
You can deduct car loan interest if you own a car for business purposes.
- If you’re self-employed and use your vehicle primarily for work.
- If you purchased the vehicle for personal use but also use it for business purposes–you can claim tax deductions for business-related trips and expenses.
- If you bought a car to use it only for business purposes.
When car loan interest is not tax-deductible
Even if you primarily use your car for commuting, you may not deduct your car loan interest for personal use.
How can you write-off car loan interest?
There are two common ways to write off car loan interest if you use your vehicle for business: the actual expenses method and the standard mileage rate method.
Actual expenses method
With the actual expenses method, add up all the money you spent on vehicle expenses, then multiply that by the percentage of the vehicle’s use for business.
For example, if you spent $5,000 on car expenses last year and used your vehicle for business purposes 50% of the time, multiply .50 x $5,000. This equals $2,500, your tax-deductible amount. If you use your car for only business purposes, simply add your car expenses for the year.
Who should use the actual expense method?
The actual expenses method benefits those with their own business or who are self-employed (freelance workers or independent contractors). For this group, writing off actual expenses generally results in a higher deduction than using the standard mileage rate.
Standard mileage rate method
This is a straightforward way to calculate deductions because you don’t need to keep track of purchases. You simply need to know how many miles you drove for business during the year.
The easiest way to track mileage is with a mileage log, which allows you to note business mileage vs. personal mileage. To calculate your deduction, multiply the standard mileage rate (the final 2022 rate was 62.5 cents per mile, up from 58.5 cents per mile during the first half of 2022) by the number of miles you drove for business. If you drove 3,000 miles for work, you would calculate like this:
- 1,500 x 0.585 = $877.50 (split the total miles between the standard mileage rate from the first half of 2022 and the second half of 2022)
- 1,500 x 0.625 = $937.50
- $877.50 + $937.50 = $1,815 standard mileage deduction
Who should use the standard mileage rate method?
If you drive a lot for work (Uber or Lyft driver, delivery driver, etc.), the standard mileage rate is the best option to maximize your tax deduction.
What documents are needed to claim car loan interest tax deductions?
If you’re planning on claiming car loan interest as a tax deduction, keep these documents:
- A log of all trips taken for business purposes, including the mileage log.
- Car loan payment bills or statements showing interest paid.
- Parking and toll receipts–you can’t actually write these off as part of your car loan interest deduction, but it’s helpful to have these as proof that your vehicle was used for business purposes.
Pros and cons of car loan interest tax deductions
There are benefits and drawbacks to the overall process of claiming car loan interest tax deductions as well as each particular method.
- You recover some of the money you spent on your vehicle during the course of the year.
- For actual expenses, if you drive the car a typical amount, you get a bigger tax break than by using standard mileage.
- With standard mileage, you get a bigger tax break if you use the car heavily for business.
- Overall, you have to keep track of mileage as well as any related expenses.
- For actual expenses, this can be time-consuming, since you need to include all vehicle-related expenses.
- For standard mileage, you get a smaller tax break if you don’t drive the car frequently for business; and you have to track all of your business vs. personal mileage.
Get answers to all of your tax questions
As you look to maximize your tax deductions for last year, claiming your car loan interest can be helpful–but only if you use your car for business purposes. And especially if you use the vehicle heavily for work. If not, you’ll likely need to look elsewhere for tax deductions. If you need help doing so, Sun Loan is here for you! We offer expert assistance for all your income tax needs–and we can help you online, in person at one of our many local branches, or with our drop-off tax service!