If you thinking about auto loan refinance, you might want to know if the interest you pay on the new loan is tax deductible. Refinancing alone does not give you a tax break, but if your car is used for work you might be able to take a tax deduction. Let’s look at when it makes sense to look for a tax break.
Tax Deductible Interest
Certain types of interest are deductible on most income tax returns; however, car loan interest does not fall automatically into any category. Some people use a home equity loan to purchase their car in order to get a tax benefit. This works because mortgage interest is generally tax deductible.
Are You Paying High Interest?
If your current auto loan has a high interest rate, then looking for a tax deduction might be a way to ease your debt burden. Another strategy is to look to refinance your auto loan. Many times the lower interest rates on refinancing can save you thousands of dollars.
Do You Qualify As A Business?
Let’s say you own a pizza shop and part of the business is a car that your employees use to deliver pizza. This is clearly a legitimate business expense, and the car loan interest can be tax deductible. In other cases, like contracted persons, it might not be so clear.
Do You Qualify As Self-Employed?
If you use your car for business travel, this is a legitimate tax deduction. You have two choices when it comes to deduction calculation:
- Standard IRS determined mileage rate
- Actual expenses
The standard rate has simpler record keeping requirements. All you do is keep track of the miles driven and date for any given business trip. Then you multiply the year end total by the IRS mileage rate for the given tax year. The final result is your deductible.
To determine the actual expense you have to keep track of all your driving expenses for business including fuel, operating, maintenance, and insurance costs.
Bе Careful And Keep Detailed Records
Car deductions are notorious red flags for tax audits. This should not discourage you if it is a legitimate business expense. Just make sure you keep excellent records.
Save Money On Your Auto Loan
While tax deductions can save you money, refinancing your auto loan first might make more sense. If your interest rate is high, it pays to look into refinancing possibilities. You can get free quotes online with refinance networking services like CARCHEX. Our service has connections with nearly 100 lenders who compete for your business. Refinancing alone might save you much more than any tax deduction.
The Bottom Line
Use every legitimate strategy to reduce your car costs. Consult with a reliable accountant to make sure your deductions won’t cause any problems with the IRS. Finally, consider refinancing first to get your monthly car payments as low as possible.
Published in CARCHEX Auto Finance Resources by CARCHEX on November 12, 2014