The interest you pay on loans, such as student loans, business loans, and mortgages, can be deducted from your taxes, thereby lowering your annual taxable income. You can also deduct the interest on your car loan, but car loan tax benefits aren’t open to everyone, unlike the previously mentioned loans. Before you claim tax benefits on your car loan only to find out you don’t qualify, here’s what you need to know.
Who Can Qualify for the Tax Benefits on Car Loans?
Salaried employees cannot deduct the interest paid on a car loan from their annual taxes. Only business owners and self-employed individuals qualify for tax benefits on car loans because their cars can be considered a business expense.
How Can You Claim Tax Benefits on Car Loans?
If you’re eligible for tax benefits on your car loan, here’s how you can claim your benefits:
Demonstrate You Use the Car for Business Purposes
First, you’ll need to show that you use the car for business purposes, not personal ones. But, if you use the car for both business and personal purposes, you’ll need to account for the amount of time you use the car for each purpose when calculating the interest to deduct on your taxes.
For instance, if you use the car for business purposes 50 percent of the time, you can only deduct 50 percent of the loan interest on your taxes. This means that if you pay $2,000 in interest on your car loan every year, you can only claim a $1,000 deduction.
However, you can claim full tax benefits if you use the car strictly for business purposes.
You’ll need to keep detailed records and documentation showcasing all auto expenses to demonstrate the authenticity of your claim. Some essential records you’ll need to keep include:
- A record of gas, insurance, and maintenance fees
- A record of all the trips taken in the vehicle for business purposes, including an odometer reading to show mileage
- Car loan records to show the interest paid
You may also want to keep parking and toll receipts. While you cannot use them to claim tax benefits on your car loan, you can use them as proof the vehicle was used for business purposes.
Overall, these records can come in handy if you are audited. As a rule of thumb, keep them for at least three years from the date you file your taxes.
Hire a Professional
If you’re unsure about whether you’re eligible for tax benefits on your car loan or how to properly deduct the interest paid on your car loan, consult a tax professional.
A tax professional can simplify the process and advise you on whether claiming tax benefits on your car loan is worthwhile. For instance, if you use the car for business and personal purposes, it may be unfeasible to claim tax benefits if the car is largely used for personal rather than business purposes. To save money, the professional may recommend you refinance car loans instead. The experts at Lantern by SoFi recommend doing this if you’re looking to lower your monthly car payments on an existing loan.
Claiming tax benefits on your car loan can offer significant savings if you’re a business owner or you’re self-employed. However, before you claim the deduction, confirm you qualify and hire a professional if you’re uncertain about how to go about the process