The cost of operating and maintaining a car used for business purposes, including depreciation, is deductible. The business can provide a car for a child. If the child uses the car for both personal and business use, the value of the personal use is taxed to the child. Even though the value of the personal use of the car is taxed to the child it will be at a lower 10% rate, with a standard deduction first at $12,000, and then the child may be able to use the American Opportunity Credit or Lifetime Learning Credit to offset any tax liability.
Specific Details
The parents shifted $5,000 of income to their child by deducting the cost of operating and maintaining a car used by their child for business purposes. Since the parents income was taxed at the 30% tax bracket, the income reduction may decrease their income taxes by $1,500 ($5,000 x 30%). Since the child’s taxable income was taxed at the 0% tax bracket, ($12,000 standard deduction) there may be no tax on the income. Therefore, because of the income shifting, the total family tax savings may be $1,500.
Potential Savings
If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by deducting the cost of operating and maintaining a car used by your child for business purposes.