How do auto-loan payments factor into taxes for cars that are solely used by dependent(s)?

Question

I financed a car under my name so that my sister could drive to work and my mother (who I'm claiming as a dependent, myself as head-of-household) could get groceries and run basic errands. I myself do not use the car at all—I live on the other coast.

How do I factor this into my taxes? That is, do I count these payments as support given to my mother (and sister—though I'm not claiming my sister as a dependent because she earns enough of her own income), or is it something that's counted as if it's entirely used by me and only me (with no regard to my family)?

My argument for the former is that, I could have just as well had my mother purchase the car in her name (albeit at a higher interest rate—I have slightly better credit) and given her the funds monthly. But I can see the argument for the latter in that, I'm "transferring" use of a vehicle I "own" (at least, financed) to family members, and so it has nothing to do with (direct) support. (In which case, I assume my best course of action is to "sell" my car to my mother or sister as soon as possible, for next year's taxes...)

If it matters, the amount is a 60-month loan at $400/month.

Answer 1

It only matters for purposes of the dependent, so if you are clearly at 50%, then you don't need to calculate this cost. If it is close to not being 50%, then you will have to allocate between your sister and mother. To calculate support costs, you can of course include the costs incurred for transportation, per Pub 17 p 34. If you and your sister have an arrangement where she uses the car and in exchange she shoulders extra costs for your mother, then that's legitimately your expense for your mother (as long as this is a true agreement, then it was money she owed you but paid directly to the vendors and creditors that you would have paid).

Note that there is a simpler avenue. If your sister agrees that you will claim your mother as dependent, and nobody else provides any substantial support (10%+ of costs), then she can just agree that it's you who will claim her. If you like, such an agreement may be attached to your taxes, possibly using Form 2120. As a general rule, though, you do not need to use 2120 or any other agreement, nor submit any support calculations. If your sister verbally agrees that she hasn't and won't claim your mother, then it's unlikely to cause any problems. Her signed agreement not to claim your mother is merely the most conservative possible documentation strategy, but isn't really necessary. See Pub 17, p 35 on Multiple Support Agreements for more info.

Answer 2

I don't see how allowing usage of your vehicle is less support than giving money to buy their own vehicle. If that's the only vehicle your mother has - then you're supporting her. Quantifying that support may be difficult though, but if you are providing her all of her needs - it doesn't matter.

If she does have income of her own, I do not think that you can put the actual amount you're paying as part of the calculation towards the 50% rule since she would otherwise have bought a much cheaper car. But if you pass the 50% threshold even without the car payments - then you're fine either way.