Can I Deduct New Car Sales Tax If It's Financed?

You can typically deduct state and local taxes on your federal return. This could help reduce your federal income taxes. But it doesn't always make sense to do so. The answer depends on your jurisdiction and whether you also pay state income tax. It also depends on whether your state income tax liability is higher than your sales tax expenses for the year.

Financing and Taxes

You are assessed sales tax in the year you buy the vehicle, regardless of whether you finance it. If you take a deduction for sales tax, you would take the deduction for the year you buy the vehicle and incur the sales tax liability.

Itemized Deductions

As of 2012, you can only claim a deduction for sales tax paid as a miscellaneous itemized deduction. This means you can generally deduct the tax paid only to the extent that the tax, combined with other miscellaneous itemized deductions, exceeds 2 percent of your adjusted gross income. Some taxpayers are better off taking the standard deduction instead of itemizing.

Claiming the Deduction

To claim the deduction, fill out IRS Form 1040 and Schedule A, "Miscellaneous Itemized Deductions." You cannot use Form 1040 EZ. Note that if you are subject to the alternative minimum tax, you may not be able to claim state and local taxes paid as deductions.

Income vs. Sales Tax

Generally, the law allows you to deduct sales tax paid or state income taxes, but not both. The sales tax deduction tends to make the most sense for those with no taxable income, or in states with very low or no income taxes. The Internal Revenue Service has published a series of tables to help you calculate your estimated sales tax deduction, or you can use receipts and other documents to show the amount you paid. If you bought a large-ticket item such as a car and the purchase was subject to sales tax, you may want to use actual taxes paid rather than rely on the IRS tables.