Is sales tax paid on the purchase of a new automobile deductible on either state or federal forms?
Not really. Years ago the IRS allowed a deduction for automobile sales tax on the federal form, but that deduction was removed over a decade ago. Indiana doesn’t allow any such deduction.
However, if you use your car in part for business, you may get to deduct part of your sales tax. The amount of sales tax you paid gets added to the cost of the car and can resurface as part of a depreciation deduction, depending on how you report the business usage of your car. If you deduction business usage of your car based on a flat rate per mile for business miles driven, there is no depreciation deduction.
Excise tax is deductible
Although sales tax is generally not deductible, you are entitled to take an itemized deduction on Schedule A of your federal tax return for the excise tax that you pay when you purchase license plates. Each year when you renew the plates you incur another excise tax expense, and this you can continue to deduct on your federal tax return. There is no comparable deduction on the Indiana income tax form.
Some states don’t charge this excise tax and instead charge a flat fee for the license plates, no matter what kind of car you drive. If your car is licensed in a state that doesn’t charge excise tax, there is no deduction allowed.
In Indiana, every driver pays a different fee for license plates, based on the value of the car. This fee is the excise tax which is a form of property tax, and this tax is the deductible portion of your license plate expense. On Indiana vehicle registration forms, the deductible portion of the license plate fee is described as “County tax.”
On the federal Form 4835, which is a farm report, you can deduct your real estate farm taxes, but on the state form you have to add that back on line two. Is there any chance we will not have to add that back?
B. G. Indianapolis
The theory behind the tax add-back on Indiana tax returns was that you took a deduction for property taxes
relating to your business on your federal return, and the income from that business, which was reduced by the property tax, got passed on to your Indiana return. Since Indiana didn’t allow a deduction for property tax, you had to add back the amount of property tax you deducted to arrive at your net business income, and pay tax on that amount in Indiana.
Starting with 1999 tax returns, farmers and other business operators who formerly had to add back that real estate property tax deduction on their state returns will no longer have to do so. Indiana now allows a deduction for property taxes, so the state no longer requires any add-back of property taxes that are deducted on the federal return.
The 1999 Indiana tax form is a bit misleading in this area because the Tax Add-Back still appears on line 2 of the Indiana form. But if you read the instructions that accompany the Indiana return you will see that property tax no longer needs to be added back.
The only taxes that need to be added back on your Indiana return for 1999 and for future years are taxes that are based on income and that were deducted on a business schedule (such as Schedule C, C-EZ, E, or F) of your federal return. This will affect very few taxpayers.
For the most part, the only taxpayers who will face a tax add-back on their Indiana returns are taxpayers who have a deduction for state income taxes passing through to them on a partnership, trust, or S corporation return.
Property Tax Deduction for All!
While on the subject of property taxes, be sure to note that Indiana now allows individuals to take a deduction on their Indiana income tax form for the property taxes they paid on their personal residence, up to a maximum of $2,500. You must attach Schedule 1: Indiana Deductions to your Indiana income tax return in order to take advantage of this deduction.
Renters also get the benefit of this benevolence bestowed upon taxpayers by the Indiana Department of Revenue. The renter’s deduction, formerly a maximum of $1,500 of rent paid during the year, has been increased to $2,000. This too is computed on Schedule 1 of the Indiana return.