Do You Pay Tax on Car Rebates
Tax rates and charges on a vehicle differ by state and often by town. Edmunds.com states that 21 of 51 reported states do not charge tax on dealer rebates, based on an updated report from January 2011. Additionally, four states do not charge any tax for vehicle purchases.
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To find out how your new vehicle and its rebates are taxed, ask your selling dealership or call your state's motor vehicle department. State tax rates may differ by area, so the amount you can expect to pay may be different than a friend or relative pays in a nearby town or city. If you're leasing a new car, you will not pay taxes on the full vehicle's price, but rather your monthly payment amount, so rebates may not apply.
Trade-In Exception
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Your trade-in likely warrants you a tax deduction, as well. Edmunds.com states that only 8 of 51 states do not recognize the tax value of a trade. If you do have a vehicle to trade, the trade value is deducted from your new vehicle's sale price and tax is figured on the remaining balance. If you have a loan on your trade vehicle, its payoff does not affect the vehicle's trade value and tax savings, even if you owe more than the car is worth.
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Dealer Discount Exception
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Dealer discounts and manufacturer rebates are also viewed differently in states that tax the car's rebate. A rebate is offered by the manufacturer, serving more as a down payment than a discount. You can still negotiate the price of a vehicle's manufacturer's suggested retail price. If the vehicle you purchase costs $25,000 and you negotiate $2,000 off of the price of the vehicle before any rebates are applied, you will be taxed on $23,000 instead.
Figuring Your Tax
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Assuming that your tax rate is 8 percent, use the following calculations to figure out your tax charges. For new cars in states that tax rebates, multiply the vehicle's MSRP by 8 percent (.08) to determine your tax charge. When a trade is involved, subtract the trade value from the MSRP and multiply by 8 percent to obtain the tax charge. If you live in a state that taxes rebates, but you negotiate the vehicle's MSRP to a lesser amount before rebates, multiply the negotiated sales price by 8 percent. You may also deduct your trade value from the negotiated price before determining tax.
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