So you're finally sitting at the desk of the financing officer at a new car dealership. He pushes the final paperwork in front of you, and you discover that the amount you and the salesman just agreed on looks a bit different. This is likely because you forgot to factor in applicable taxes related to buying a new car.
When you buy a new car, the dealership is required to charge you sales tax, if applicable to your state, in addition to your other costs. In many states you can finance the cost of the sales tax with the price of the car, but if possible pay it off upfront to avoid paying extra interest expenses over the life of the loan. The dealership routes your sales tax payment to the appropriate tax authority or your state's department of motor vehicles. Keep in mind that in some cases you may have to pay the state sales tax directly to your state's department of motor vehicles within a certain amount of time after buying. In that case the dealership paperwork doesn't list the sales tax.
How the Tax Is Calculated
The tax calculation on a new car is straightforward. You must multiply the state sales tax rate by the actual price of the car, which is the MSRP (manufacturer's suggested retail price) less any discounts offered by the dealer. Keep in mind that some states may also charge you sales tax on any rebates you get back later, even though it effectively reduces the sales price of the car — check your DMV rules. You have to review your sales invoice for the final figures. So for instance, for an 8 percent sales tax rate on a car that costs $12,000 after discounts, the tax amount due is $960.
Not all states charge sales tax on purchases. Those states were Alaska, Delaware, Montana, New Hampshire and Oregon as of 2010. If your state does not charge sales tax on purchases, this is one extra fee that you won't have to worry about seeing on your final invoice paperwork. But keep in mind that the DMV may still charge new car fees and expensive registration costs that seem like a tax on the purchase.
Keep in Mind
In some cases you can deduct the amount of state tax you paid when buying your new car on your federal tax return. If you itemize your taxes, there is a section called "Taxes You Paid" where you can choose to either deduct the state income tax you paid for the year or the total of your sales tax expenditures for the year. So if you just bought a new car that year, it's worthwhile to consider taking the sales tax deduction that time around. A tax law update for 2009 allowed some car buyers to deduct the sales tax paid on a new car even if they didn't itemize, but that benefit may not be extended in all tax years.