How Can A Car Registration Fee Be Tax-Deductible?
Owning a car can feel like an additional expense for a person who already has too many monthly expenses. But Yes, your car registration fee can indeed be tax-deductible. You can claim the annual car registration fee as a tax deduction on the federal return but only to a certain extent. The tax deduction depends on the exact prices of car registration and its cost to you. But in some cases, the car registration fee falls into the category of personal property tax, which makes only a portion of your expenses tax-deductible.
Annual car registration fees can be tax-deductible under certain circumstances, which are as follows:
- Value-Based Portion: The part of the registration fee that you pay based on their vehicle’s value, including its size, age, or other characteristics, can be claimed as a tax deduction.
- Itemized Portion: If a portion of the registration fee is deductible, you need to itemize your deductions to claim it in your federal tax return.
Identifying Value-based Portion
Different states have different criteria to decide the value-based portion for a tax deduction. Depending on your state, you need to determine what part of your car registration fee qualifies for the tax deductions.
- For example, in California, the value-based portion is the license fee, labeled explicitly as tax-deductible.
- Iowa provides a list or worksheet to determine the deduction based on the car registration document.
- In Texas, you cannot claim any deduction on the registration fee based on car value.
Annual Fees
A value-based auto registration fee should be assessed on an annual basis. In short, what matters is how much tax you need to pay every year and not how much tax you are paying. It is based upon you if you want to pay half of the fee every six months or pay the whole two years’ costs at a time, but the tax deduction is determined on a per-year basis.
Itemizing Your Deduction
Itemized deductions are only preferable if your itemized deductions exceed the standard deduction value for filing status. That means you cannot opt for both itemized and standard deductions. You must opt for the one which will reduce your taxable income the most. To deduct the car registration fees, list the items that fall under Schedule A, Line 7. Then the total of itemized deductions is to be entered on Form 1040. Compare your itemized deduction with the standard deductions. If the sum of itemized deductions is higher than the standard deduction, then only choose it; otherwise, it’s better to choose the standard deductions.
According to the changes made in the TCJ Act, state & local tax itemized deductions are up to $10,000 while it is up to $5,000 for a married couple filing individually. Moreover, if you are self-employed, you can skip itemizing to claim your federal tax registration fees. It may be possible that you will receive only a percentage of the charge.
