Wednesday, March 23, 2011

Vehicle Registration Renewal Fee Is Not 100% Tax Deductible

I have seen almost every new client who came to my firm from other CPAs, HR Block, some unknown hair salon or travel agency which also did their prior year taxes, claimed on their 1040 itemized deduction, the full amount they paid to DMV to renew their registration. This is wrong because according to the Treasury Regulations Sec 1-164-3(c), state and local taxes imposed on personal property has to be ad valorem (substantially in proportion to the value of the property) in order to be deductible on 1040. The DMV registration renewal fees however includes other fees in addition to this "ad valorem" property tax.

When I see how almost the whole USA (at least in California) is deducting the full amount of the DMV registration and how there are so many CPAs, licensed or not licensed tax preparers are doing this for their clients, I am in awe. I'm in awe that there are actually so many so-called professionals who are practicing accounting this way. I don't know if they are real ignorant about it or they are just being "aggressive". I have to spend a lot of time explaining to all these new clients why I'm not deducting as much automobile registration renewal fee as their previous tax preparers (which includes their hair dresser whose hair salon also has neon sign blinking "Tax Preparation"). To find out how much DMV fee you can actually deduct, (I think different states call it differently, I only know about California), go look for the line where it says Vehicle License Fees on your DMV renewal bill and you can deduct no more than that. For those of you who still have difficulty finding the right deductible amount, click here and the DMV website will do the calculation for you.

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