Cars are one of the most expensive items to own, both in terms of the initial investment we make in them and in the cost of ongoing maintenance. Fortunately, there are valid ways to offset these expenses with tax deductions. You might qualify for one or more of these options for personal, small business, self-employed or business deductions. (If you're not taking advantage of these deductions, you could be missing out on tax savings. Check out 5 Tax Credits You Shouldn't Miss.)

IN PICTURES: 9 Ways To Use A Tax Refund

1. Charitable Contributions
If your old car isn't going to make it much longer, and the cost of repair isn't worth the investment, consider donating it to charity rather than trying to make a little money selling it used. You'll save the hassle of putting up an ad and dealing with potential buyers who want to talk you down from your price. And if you know your car isn't worth a whole lot, you may be better off donating it, which will give you a deduction for the market value the car still has. Many charitable organizations will even pick up your donated car for you. This method of tax deduction can apply to personal or business application, just make sure you get an official receipt from the charity, which should include the value of the vehicle you donated.

2. Hybrid Cars
If you purchased a hybrid car on or before January 1, 2011, you can get a tax credit which directly deducts an amount from your federal tax owed, dollar for dollar. Unfortunately, the credit program phased out, so hybrid car purchases after January 1, 2011 cannot be claimed on your taxes. Businesses might be eligible for this tax deduction too, if you've purchased a new hybrid car or restocked your business fleet with hybrid vehicles prior to the deadline. While hybrid vehicles can be fairly expensive, the offset from a tax deduction, plus the money you'll save in fuel, can make this a smart investment.

3. Convert Your Car
Keeping your current car but wanting to reduce emissions? Look into a electric drive conversion kit, which you can hire a professional mechanic to install onto your car. Before you purchase the kit, get a mechanic's opinion on whether your car is worth converting; in some cases, such as on older cars that don't have much life left in them, the cost of conversion may be an investment not worth making. But if you have a newer car with a lot of life left in it, converting can save you on fuel daily as well as giving you a nice tax credit, up to $4,000. The tax credit for conversions phases out on December 31, 2011, so convert your car this year.

4. Deduct Business Use
If you are a freelancer and otherwise self-employed individual, you can deduct the cost of business use, even if it's on your personal vehicle. This is the best method for those who work under a sole proprietorship rather than as a legal business structure such as a corporation. The key here is to separate business use from personal use, which can be done by using some sort of tracking mechanism like CarCheckup, a small device which plugs into your car for business trips and then uploads mileage information and other data to your computer when you plug it in via USB.

5. Small Business Fleet Deductions
If you're running a small business, a vehicle used exclusively for business can add to your yearly tax deductions as part of your operating expenses. While the cost of overhauling a business vehicle doesn't qualify as a deduction (overhauling must be included in capitalization cost and calculated in the depreciation cost), the cost of repair can be deducted. Keep clear records of repairs, because just claiming an estimated cost won't go over well with the IRS.

IN PICTURES: Top 10 Solutions For A Big Tax Bill

6. Unreimbursed Business Expenses
If you're employed by a company and have used your own personal vehicle for business-related purposes, you can claim those expenses on your tax deduction if your company has not reimbursed you. These expenses could include fuel costs and maintenance, and are usually best calculated by using a per-mile cost, which the IRS updates on a regular basis. As with self-employed tax deductions, the key is to keep clear records and differentiate between business use and personal use.

The Bottom Line
Unless you're using your car exclusively for your business, you can't deduct the full cost of purchasing, maintaining and repairing it. You can and should, however, deduct what you can. The key, as with almost any issue to do with the IRS, is having clear records to support your claims. (Besides creating ongoing income and capital appreciation, real estate provides deductions that can reduce the income tax on your profits. See Tax Deductions For Rental Property Owners.)

Related Articles
  1. Budgeting

    Beer of the Month Subscription Review: Is It Worth It?

    Learn how you can get access to some of the best craft beers produced in the world, delivered right to your front door every month.
  2. Budgeting

    Just the Right Book Review: Is It Worth It?

    Take an in-depth look at Just the Right Book, a subscription service that delivers personalized book selections based on your reading history and preferences.
  3. Entrepreneurship

    ‘Happy Birthday to You’ Belongs to Everyone Now

    A class action lawsuit over the copyright to the iconic American song “Happy Birthday to You” ends by placing the ubiquitous ditty in the public domain.
  4. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  5. Tax Strategy

    Profit from Art with a Charitable Remainder Trust

    With a CRUT, art collectors can avoid capital gains taxes on the sale of art– while also leaving their favorite charity a legacy.
  6. Budgeting

    The Honest Company Bundles Review: Are They Worth It?

    Learn more about The Honest Company and its bundle subscription services, which deliver discounted diapers, formula and other baby products to your doorstep.
  7. Budgeting

    Blue Apron Review: Is It Worth It?

    Read about one of the top meal-kit delivery services in the United States, and learn more about what it offers and how much it costs.
  8. Home & Auto

    Don't Be the Victim of Auto Loan Rip-Offs

    Subprime auto loans – and 60-day delinquencies – are up. These 4 signs of predatory auto loans can tip you off before you're caught in one.
  9. Stock Analysis

    JCPenney's Path To Profitability (JCP)

    Learn about what J.C. Penney's management team has been doing to profitably grow its business as the company recovers from years of revenue declines.
  10. Home & Auto

    The Latest Airbag Recalls: What to Do

    The latest warnings are from Honda/Acura and Dodge. How to look up your car – and what to do if you find it on the recall list.
RELATED FAQS
  1. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  2. How does a cost-of-living adjustment (COLA) affect my salary?

    Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. ... Read Full Answer >>
  3. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
  4. Where can you buy NetSpend reload packs?

    You can only purchase NetSpend reload packs at Giant Eagle, Albertsons, Roundy's and Pathmark supermarkets. NetSpend cards ... Read Full Answer >>
  5. Are Cafeteria plans subject to FICA, ERISA or FUTA?

    Cafeteria plans are employer-sponsored benefit plans that provide both taxable and nontaxable, or qualified, benefit options ... Read Full Answer >>
  6. Are tax shelters legal in Canada?

    Most tax shelters are legal in Canada. However, there have been illegal tax shelter scams that the Canada Revenue Agency ... Read Full Answer >>
Trading Center