Interest on your vehicle loan, did you wonder how to claim it on your taxes? Is it tax deductible? That depends, how is the vehicle is being used? Is it for business or personal use, the tax form on which the expenses are being deducted, and the type of loan you secured.
If the loan were a consumer loan secured by the vehicle, then the following rules would apply:
- If the vehicle is being used partially for business and the expenses are being deducted on your self-employed business schedule. Only then is the business portion of the interest deductible as business interest. The personal portion of the interest will not be deductible.
- If the vehicle is being used in part for business as an employee and the expenses are being deducted as an itemized deduction. In this case, neither the business portion nor the personal portion of the interest will be deductible.
- If the vehicle is entirely for personal use. None of the interest will be deductible. This is because the only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest.
Other Alternatives for Deductible Interest on a Consumer Loan
As an alternative to a nondeductible consumer loan, you might consider purchasing that vehicle with a home equity line of credit. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to the purchase of a vehicle or motor home. Using a home equity line will generally make the interest tax deductible.
Before borrowing against the home, you should consider the following:
- Treat the home equity loan like a consumer loan and pay it off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for.
- When buying a car, you can sometimes get very favorable interest rates or a rebate. To determine which is best, compare the difference in total loan payments over the life of the loans to the rebate amount.
- It is also good practice to make sure the benefit of making the interest deductible is greater by using the home equity line of credit than the benefit of the low interest consumer loan or the rebate.
- If there is any chance of defaulting on the loan, the repercussions from defaulting on a home loan are far more serious than on consumer debt.
Were you hoping to deduct your vehicle loan interest?
Do you need assistance deciding what coarse of action is best for you and your business? There are less than three weeks to go to file your taxes. Do you have questions about filing your tax refund? If you have thoughts, questions or concerns about a strategy, contact us or visit any one of our locations. We have an ultra-convenient service and can schedule an appointment for you. You may also leave your comments below or post on our Facebook, Google+ or LinkedIn pages.
Tax Season is Here!
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