In 2017 we looked at savings offered for purchases of hybrid and electric plug in cars in our article “Hot Wheels, Big Savings”. What are some other considerations to be made at tax season when it comes to vehicles and your deductions? Here we look at the increase in mileage rates for 2019, changes to depreciation, and how taxes can impact the sale or purchase of a vehicle.
2019 Mileage Rates
The IRS has shared the 2019 mileage rates for vehicles used for business, charitable, medical, or moving purposes. However, due to the changes brought forth under the Tax Cuts and Jobs Act (TCJA), many taxpayers are not able to claim mileage. For example, the TCJA has suspended itemized deductions for unreimbursed employee travel expenses through December 31, 2025. Therefore, standard mileage rate provided cannot be used to claim an itemized deduction.
The rates for business use have increased 3.5 cents to 58 cents per mile. For medical or moving purposes the rate increases 2 cents to 20 cents per mile. Medical purposes include driving for medical care that is essential for yourself or dependents. Another change of the TCJA states moving expenses can only be claimed by members of the Armed Forces on active duty moving under orders to a permanent change of station.
There is no change in the rate for charitable organization mileage. That rate remains at 14 cents per mile. All rate changes are determined based on an analysis of fixed and variable costs for operating a vehicle based on annual studies. Details can be found under Notice-2019-02 and the IRS also provides greater detail under Deducting Business Use of a Car.
Unless you incur very high vehicle expenses during the tax year, the higher standard deduction provided by the TCJA is generally the more advantageous choice at tax time. Fortunately this requires less cumbersome record keeping throughout the tax year.
Actual Expenses: Depreciation
The TCJA brought bigger depreciation allowances for vehicles used for business purposes. This includes new or used vehicles acquired in 2018 and used more than 50% for business purposes. If the vehicle is not solely used for business purposes, allowances are reduced in proportion. Maximum allowances are $10,000 for Year 1 or $18,000 if you claim first-year bonus depreciation, $16,000 for Year 2, $9,600 for Year 3, $5,760 for Year 4 and thereafter until the vehicle is fully depreciated. in order to be eligible for depreciation used vehicles cannot have previously been utilized by the business.
Vehicle Sales and Taxes
If you sell your automobile privately and receive less than what you originally paid for the car, you do not need to pay sales tax. This is considered a capital loss by the IRS. However, if you make improvements to your vehicle which allow you to sell it for more than you paid for it, you are realizing capital gains. This will need to be reported to the IRS in detail – outlining the amount that you paid to improve the car. Taxes will be paid on the amount of gain realized above what you spent on improvements. As always, good receipts and records of these improvement costs will be needed.
When you purchase a vehicle, you will need to pay sales tax on the car if the state in which you register the car charges sales tax. This tax is paid to the state’s DMV when you register the vehicle.
There are pros and cons to a private sale of vehicle and to using a dealership. Typically you will receive more money selling privately. Going to a dealership to sell your car, especially if you plan to do a trade in, can be advantageous for tax purposes. The dealer will subtract the cost of your trade in from the sale price of your new car – lowering the taxable price you pay.