Automobile Tax Deduction

Dont miss out on automobile tax deduction

There are two kinds of automobile tax deduction available under the federal law in the US. The first is for those automobiles that qualify as clean fuel vehicles and gasoline-electric hybrids. The second is for automobiles that are donated to charitable organizations.

Owners of the clean fuel vehicles can receive a one-time tax deduction up to $2,000 while owners of electric vehicles can get a one-time tax credit of $4,000. The IRA describes the clean fuel vehicles as those that are run on Natural gas, Liquefied natural gas (LNG), Liquefied petroleum gas (LPG), Hydrogen, Electricity (like gasoline/electric hybrids) and any other fuel that is at least 85% alcohol or ether (like E85).

The tax deduction covers the cost of the vehicle's engine, the equipment used to store or deliver the fuel and the equipment used to exhaust combusted gases provided the expense on this head is not more than $2,000.

This deduction applies for vehicles bought in the year 2005. Those who had purchased an automobile in 2004 or any other taxable year have to fill an amended tax return Form 1040X for that year.

Further Requisites:
The vehicle must be new and purchased for personal usage. It cannot be bought for resale.
The vehicle must be used primarily in the US.
The vehicles pollution/emission capacity must meet all federal and state requirements
The vehicle must have four or more wheels, and should be driven on road. (does not include vehicles operating on rails)

If any of the above requirements get altered within 3 years of purchase, the taxpayer may have to pay back some of the amount that was claimed as tax deduction.

This deduction is valid up till December 31, 2005. Vehicles bought in 2006 and later, may be entitled to a federal income tax credit. However, this is dependent on the fuel economy, fuel savings and other factors.

The second head under which tax deduction is available is vehicle donation. The rules for this are slightly more complicated. The exact tax break depends on the donor's claimed value of the gift and how the charity uses the vehicle. Thus you may not know the size of your deduction when you make the donation. In addition, there is a $500 limit on the donated vehicles value, beyond which the rules get even more complex. A donor also gets a fair market value deduction if the charitable organization conducts major repairs that significantly increase the value of the donated vehicle.

It is therefore better to sell the vehicle and get cash in hand than get a relatively small tax deduction. An automobile should be donated when you dont wish to spend money on souping it up, and, of course, if youre in a generous mood!

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