When you buy a new car you beat down the salesman to give you the best price and then pat yourself on the back for resisting all the little add-ons. You settle on a final price but then you reach the closing table and find you owe thousands more than the agreed-upon price. Don’t blame the dealer, blame your local government. You have to pay sales tax on the car, plus a variety of fees.
Sales tax is charged on a new-car purchase just as it is on almost anything else you buy. Used-car purchases are also taxed in most states, even if you buy from a private seller. The rate depends on the state and municipality where you buy the car. Since you must register your vehicle in order to have a current license plate, it’s hard to pull the wool over the eyes of state governments. In most cases, they’ll make you provide paperwork to prove that you paid sales tax. In New York state, for example, if you do not provide proof of sales tax payment, the Department of Motor Vehicles will collect it from you directly.
Registration and Fees
Wherever you live, you’ll have to pay a registration fee every year or two. It’s not labeled as a “tax,” but as a fee collected by the government that’s essentially what it is. There are also registration and title fees payable when you buy the car,.
Excise taxes, sometimes called personal property taxes, are the taxes that keep on taxing. They are usually paid to your city or county. Depending where you live, you might continue to pay taxes on your car, based on its current value, for as long as you own it. When the car is new, you’ll pay more, but the tax will decrease over time.
Keep track of how much you pay in excise tax, because it is deductible from your annual income tax, similar to the real property tax deduction. Even if you don’t itemize expenses, you can still deduct the car personal property tax. In 2009, the federal government issued an unprecedented incentive for new-car buyers by allowing them to deduct the sales tax for purchases that year from their income tax. Though that was a one-time offer, it is possible that something similar could come up again. Hybrid, electric and alternative fuel vehicles have all been given tax credits at one time or another. Taxes continually change, so always research possible incentives before looking to buy a new car.
- Kiplinger: Tax-Friendly Places to Buy a Car
- New York Dept. of Motor Vehicles: Vehicle Registration Requirements
- North Carolina Dept. of Transportation – Division of Motor Vehicles: How Do I Title & Register a Vehicle
- U.S. Dept. of Energy: Federal Tax Credits for Alternative Fuel Vehicles
- IRS: Sales Tax Deduction for Vehicle Purchases
Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.