Is Your Car Registration Tax Deductible?
Deductibility depends on several factors.
Claiming a tax deduction for car registration fees can be a tricky process. Deductibility depends on exactly what the fees are for, and how they’re charged to you. In some cases—but not all—they fall into the category of personal property taxes, and that makes at least a portion of them deductible.
But you must itemize to claim them, and itemizing isn’t always in everyone’s best interests after the passage of the Tax Cuts and Jobs Act (TCJA) in late 2017.
You Can’t Deduct the Whole Fee
Registration fees are calculated on several different factors in most states, such as your vehicle’s weight, age, and value. There’s often an add-on fee for your license plate as well. For federal tax purposes, only the portion of the registration fee that’s based on the value of your vehicle is tax deductible.
For example, your total registration fee might be $175, but if that includes $2 for each $1,000 of value and your car is worth $30,000, your actual tax deduction is limited to $60 of that $175, or $2 times 30. You can’t claim the whole $175.
It doesn’t matter if this portion of the fee isn’t technically be called a personal property tax on your billing statement. The IRS says that’s exactly what it is—a tax—at least under most circumstances.
How to Determine the Value-Based Percentage
The situation is further complicated because a guy in California might be able to pinpoint the value-based portion of his registration fee much more easily than you can if you’re living in New Jersey. It can vary a great deal by state.
California’s billing statement calls it a “vehicle license fee” and it’s clearly set apart from the total. That’s easy enough. Some states provide a worksheet for figuring out the correct portion, while others leave taxpayers to their own devices to try to segregate the value-based portion on their own.
Contact your state’s taxing authority if you’re in doubt, or ask a local tax professional. It’s a safe guess that she has some experience in pinning down her state’s maybe-elusive number.
Timing Matters, Too
The IRS imposes a couple of other rules for deductibility of car registration fees. The value-based portion of your fee is only considered a tax, making it deductible, if it’s assessed annually.
This doesn’t necessarily mean that you’re only billed once a year. Some states break the due dates into semi-annual or even quarterly payments. The key is that they’re only assessed once a year.
You can only claim a deduction for what you actually paid. If the value-based portion of your bill is $60, and if $30 is due in November and $30 is due the following May, your deduction drops by half because you can only claim the portion you actually paid in November’s tax year. You’ll eventually be able to claim both payments…but not on the same year’s tax return.
You must also be personally responsible for paying the tax. This generally means that the car is registered in your name.
You Have to Itemize
It’s can be worth all the trouble of claiming this deduction if you have a lot of itemized deductions overall, enough that their total exceeds the value of the standard deduction for your filing status.
The total of your itemized deductions might not be more than your standard deduction beginning in 2018.
You can’t both itemize and claim the standard deduction. It’s one or the other, so it obviously makes more sense to take the option that reduces your taxable income the most. Other itemized deductions that remain alive and well in 2018 after tax reform include charitable giving, medical and dental expenses, and home mortgage interest. Personal property taxes are included under the umbrella of itemized state and local taxes.
Tally up all these itemized deductions you’re entitled to claim, then compare the total with your standard deduction:
- Single and Married Filing Separately: $12,000 in 2018, increasing to $12,200 in 2019
- Married Filing Jointly and Qualifying Widow(er)s: $24,000 in 2018, increasing to $12,400 in 2019
- Head of Household: $18,000 in 2018, increasing to $18,350 in 2019
These figures are roughly double what they were in 2017 before the TCJA went into effect, and the TCJA makes another important change as well. The state and local tax itemized deductions are now capped at $10,000, and it’s just $5,000 if you’re married and file a separate return.
So if you paid $10,000 in other qualifying taxes and your total comes out to $10,060 when you include the tax portion of your vehicle registration fee, that $60 gets left on the table. It’s over the new limit. Of course, all your state and local taxes are deductible if they add up to $9,060 because this total comes in under the cap.
Claiming the Deduction
Roll up your shirt sleeves if your total itemized deductions amount to more than the standard deduction for your filing status. Now you have to enter them all on Schedule A in order to itemize, and you must submit Schedule A with your tax return.
If You’re Self-Employed
You can skip itemizing to claim your car registration fees if you’re self-employed, and you’re not limited to the portion that represents a percentage of your vehicle’s value in this case, either. But you’re probably limited to just a percentage of the fee all the same.
You can claim auto-related business expenses on Schedule C, but they’re limited to the equivalent of the percentage of miles you drove your car for business purposes. For example, you might have put 18,000 miles on your wheels during the tax year, but if you only drove 6,000 of those miles for business purposes, you can only claim 33% of your overall qualifying auto expenses on Schedule A because 6,000 is 33% of the total 18,000 miles.
Deductible auto expenses for the self-employed include fuel, maintenance and oil, tires, repairs, insurance, depreciation—and yes, registration fees.