How to get tax breaks on your car

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(MoneyWatch) Whether you are a last-minute filer for 2011 or a forward-looking tax planner for 2012, don't forget potential tax breaks on your car, especially if you use it for business.

Deductions for business driving are long-established. But an even bigger tax break -- a tax credit for buying an electric car -- has become politically charged. Subsidies for the Chevrolet Volt may be under attack in Washington, but for now the tax savings for buyers are real. The Volt and competitor Nissan Leaf both qualify for a $7,500 tax credit. That comes straight off your tax bill -- not just a deduction from income. In addition, the soon-available Ford Focus Electric and Mitisubishi i-MiEV made the government list of qualified vehicles.

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In addition, some states also have incentives for buyers of electric vehicles. To check your state, click here. If you bought an electric car in 2011, make sure you claim your credit. But if you are just considering it, the question remains: Do savings on gas make up for the higher purchase price of electrics even after the tax credits?

Business use of your car

More mundane but still crucial to filing your taxes are the deductions for business use of your car -- especially if you are self-employed. As with much involving taxes, careful record-keeping is crucial. That's especially true if you use the same vehicle for both business and personal travel, because you need to be able to prove exactly how much driving was for specific business reasons.

The IRS allows a choice of two different methods of deducting for business driving:

1. Take the Standard IRS Mileage Rate. This calculation is especially tricky for 2011. From January through June, the standard rate was 51 cents per mile. Then, with gas prices rising, the IRS adjusted that rate upward to 55.5 cents per mile for July through December. For 2012, the rate stays at that second-half level.

You still need to keep a log of your miles driven and clients seen or other business-related stops. But keeping most receipts is not crucial with this method. Even with the standard rate, however, the IRS allows additional deductions for business-related parking fees and tolls. You do need to keep those receipts.

2. Track Actual Expenses. Keep thorough records and all receipts for gas, maintenance, insurance, interest on a car loan, and an allowance for vehicle depreciation. All those items are also estimated into the standard rate. However, if you live in a location where insurance rates are high, this method might bring bigger deductions.

Traveling on business for a company instead of yourself makes deductions more complicated. If you spend more for car costs than your company pays, that can count as unreimbursed business expense. But this category, plus other unreimbursed business expenses, must add up to more than 2 percent of your adjusted gross income. Only the amount that exceeds 2 percent is deductible.

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    Jerry Edgerton, author of Car Shopping Made Easy, has been covering the car beat since Detroit companies dominated the U.S. market. The former car columnist for Money magazine and Washington correspondent for Business Week, Edgerton specializes in finding the best deals on wheels and offering advice on making your car last.