If you are facing the prospect of selling a car, you may worry that you’ll incur taxes as a part of the sales process. Many states have a flat vehicle sales tax that they publicly announce, but the sales tax can sometimes vary depending on the price the vehicle sells for. Thankfully, state sales tax is handled by the buyer of the vehicle, meaning that you as the seller only need to pay capital gains tax on the sale if you made a profit on the vehicle.
Most people purchase vehicles that steadily diminish in value over their period of ownership, so no capital gains taxes or sales tax is necessary. However, in some cases where the vehicle was inherited or otherwise gained value during the time of ownership, taxes do become necessary. Still, in most cases, selling a vehicle does not pose a significant tax burden. Even better, a potential way to maximize the value of the car is to consider seeking a personal tax write-off.
How Do Write-Offs Work?
In general, your taxes are based on the gross income you earned throughout the year. Write-offs are essentially deductions from this gross income, reducing the overall amount of taxes you must pay, especially if this deduction causes you to fall into a lower tax bracket. For example, if you make $164,000 in a year, you will rest firmly in the 32% tax bracket. Taking the IRS standard deduction lets you remove about $12,000 in write-offs, bringing your income down to $152,000 and landing you in the 24% tax bracket. That’s a tax savings of roughly 8% which is thousands of dollars in tax reduced from the standard deduction alone.
Unlike the standard deduction, when you use the itemized deduction, there is only a minimum tax reduction, meaning that you may be able to deduct more than the standard deduction. However, you must prove the tax deductions you take through an itemized deduction. To successfully maximize your deductions, it is important to learn the IRS rules surrounding this procedure. Common write-offs can include some business-related expenses, charitable donations, and even some taxes themselves, including property tax.
Business Vehicle Write-Offs
If you have a small business, you may be able to write off the cost of selling a vehicle that has gained value, whether through improvements because the vehicle was acquired at a reduced cost. However, you must prove the primary use of the vehicle for business purposes.
It is important to be sure that the vehicle in question meets IRS standards. You may also be required to pay equipment taxes if you own certain vehicles, so be sure to double-check the tax laws for your business.
Vehicle Donation Write-Offs
Many people consider donating a vehicle as a way to achieve a write-off that may exceed the vehicle’s sales value. However, there are a few considerations to keep in mind when doing so. First, you must calculate the fair market value using Kelly Blue Book, which is the standard for all fair market price dealings involving vehicles. Second, you must itemize using a Schedule A form of the IRS form 1040 or 1040-SR. This means you cannot use the standard deduction when you are filing donations and must use itemized deduction to file the claim. The only exception is if your vehicle was sold for less than $300, which you can claim using the standard deduction.
If you don’t own a business, donating your vehicle is the most straightforward means of achieving a tax write-off, but there is a hard limit. The IRS accepts a maximum vehicle donation write-off of $5,000, regardless of the fair market value of your car. The good news is that in some cases you can carry donated amounts of over $5,000 to the next five tax returns. To determine if you qualify for carryover see Pub. 526 from the IRS.
Finally, consider that you may write off your vehicle’s value only when you are donating to a charitable organization, and not to a business, friend, or family member. If the organization resells donated vehicles for fundraising purposes, you may only claim the sales price of the car—for example, if the organization sells the car for $4,000 and it is worth $5,000, you may only claim $4,000 in deductions. The exception to this rule is if the organization sells the car at a drastic discount or keeps the car, in which case you may claim the fair market value. In addition, if the organization sells the car for under $500, you can claim either $500 or the fair market value, depending on which is less.
When to Sell and When to Write Off
Whether you should write off or sell your vehicle depends heavily on your unique circumstances. Tax laws are complicated and there are a variety of different limitations that apply to write-offs when you donate your vehicle. Even if your car’s fair-market value exceeds $5,000, you may not claim more than the maximum of $5,000 unless your individual circumstances allow you to carry over the excess according to Pub. 526.
Once you know the amount to expect for your tax deduction, you can deduct that amount from your gross income. If you find that the write-off does not exceed the sales price you would have gotten for your car and does not push your gross income into a lower tax bracket, you may want to reconsider taking the deduction. For example, if you make $41,525 in gross income for the year and a charity sells your vehicle for $1,500, the deduction will put you at $40,025. This write-off, along with your other deductions, lands you in the 12% tax bracket, saving you about $4,000 in income tax. In this instance, it’s worth donating your vehicle.
However, if donating does not cause your income to fall into a lower tax bracket, you must consider whether the sale price would exceed the potential write-off. In most cases, selling your vehicle will supply more significant financial benefits, especially for individuals who cannot take a business vehicle write-off.
Maximize the Sales Value of Your Car
Oftentimes, selling your car is the better financial decision. If you are looking to sell your car, CarVIO can help you get the most out of your car’s sale value. No matter the condition your vehicle is in, all you need to do is access our website, describe the vehicle, and wait for our offer. Once you have your offer, simply choose to pick up or drop off, and we’ll pay you immediately. For more information, check out our FAQ or call (760) 493-7781 today.