How Much Tax Do I Pay on a New Car?
Most states charge tax for a new car purchase and you can benefit if you budget for the charge. Some states charge more than 10 percent tax for a new car, which can cost you thousands of dollars. Consider your total purchase price so you can decide if you want to include your taxes as a down payment or roll the charges into a loan or lease payment.
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Taxable Price
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Each state taxes new cars differently. Most states don't charge tax on a leased vehicle's total price, but instead charge taxes on your total monthly payment. When leasing, you only pay for the time you drive the vehicle, so a portion of the vehicle's price is not included in the lease payment. New cars often have rebates, or instant money off from the manufacturer, but some states do not recognize the discounted price for tax purposes. For example, if you buy a $30,000 vehicle with $5,000 in rebates, you are taxed on $30,000 unless your dealership reduces the MSRP (manufacturer's suggested retail price).
Trade-in Exception
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If you have a vehicle to trade for your new car, most states offer a tax deduction. Tax savings can prove substantial depending on your area. In states that allow this, your trade value is deducted from the new car's purchase price before tax is applied. For example, if you live in a state that charges an 8 percent tax rate and have a trade with a value worth $12,000, you save $960 in taxes since the 8 percent won't be charged on the $12,000 trade value.
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Resources
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To find out if your trade is tax deductible or if you can subtract new car rebates from the car's price before adding tax, ask your dealership for details. Find out your area's exact tax rate, which is usually a combination of state and local taxes. Aside from your new-car dealer, your state motor vehicle department can offer information. Dealerships are authorized to collect tax on vehicle purchases, so expect your dealership to provide accurate information regarding your state's tax requirements.
Tax as a Down Payment
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Consider your taxes if you plan to finance your vehicle. If you don't have a trade to offer a tax break, you can pay thousands more than your vehicle's actual price. If you can put your tax amount as a down payment to avoid extra interest charges, it is financially beneficial to do so. On the other hand, you should minimize the amount you put down toward a lease; since your taxes are on your monthly lease payment, the down payment on the lease doesn't affect your taxes as much and if you incur a loss while leasing, you'll lose any money you offered for the down payment. The insurance payoff goes to the leasing bank, not the person who pays the policy.
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