Automobile Tax Deduction Possibilities

Two types of automobile tax deduction are available under the U.S. law. The first one is for those cars which are clean fuel vehicles or gasoline-electric hybrids. The second is for cars which are donated to charity.

The owners of the clean fuel cars may get a one-time tax deduction of up to $2,000 whilst electric vehicles owners may get a one-time tax credit of $4,000. The IRA describes the clean fuel cars as being run on Natural gas, Liquefied natural gas (LNG), Liquefied petroleum gas (LPG), Hydrogen, Electricity (like gasoline/electric hybrids) as well as any other fuel which is at least 85% alcohol or ether (like E85).

Provided the expense on this head doesn’t exceed $2,000, this tax deduction should cover the cost of the engine of the car, the equipment which is used to keep or deliver the fuel and also the equipment which is used to exhaust combusted gases.

This deduction applies for all cars purchased in the year 2005. Those who had bought an automobile in 2004 or any other taxable year will have to fill in an amended tax return Form 1040X for that year.

Further Requirements:

* The vehicle must be new and bought for your personal use. It can’t be purchased for resale.
* The car must be used mostly in the US.
* The vehicle’s capacity for pollution/emission must agree with all the federal and state requirements.
* The car must have at least four wheels, and should be driven on the road. (Doesn’t include vehicles operating on rails for example).

If any of the above requirements get modified within 3 years of purchase, the taxpayer might have to pay back some of the amount that was claimed as a tax deduction.

This deduction is available up until December 31, 2005. Vehicles purchased in 2006 and later, could be entitled to a credit from the federal income tax. However, this is dependent on fuel economy, savings and other factors.

Tax deduction can be made available on the second head which is vehicle donation. The rules for this deduction are slightly more complicated though. The donor's claimed value of the gift will determine the exact tax break and how the charity uses the vehicle. So you might not know the size of your deduction when you make the donation. Additionally, there is a $500 limit on the donated vehicle’s total value. Beyond that amount, the rules get even more complicated. A donor will also get a fair deduction on the market value if the charitable organization conducts major repairs that significantly increase the value of the donated vehicle.

It will therefore always be better to sell the vehicle and get cash in your hand than get a relatively small tax deduction. An automobile should be donated when you do not wish to spend money on cleaning it up, and, of course, if you’re feeling generous!

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