This Could Save You A Ton Of Money
If youre like me, you dont enjoy paying taxes.
I understand that taxes are sometimes necessary, but at times, they can be burdensome.
I live in the San Francisco Bay Area, where sales tax when registering a new car is about 9.25%.
It would be really cool to not have to pay an additional 4, 5, or even 6 figures on top of the money I already paid the car dealer.
What Are My Tax Responsibilities If I Sell My Home Privately
Like most properties, homes are considered an asset and you may have a tax obligation if you sold your home for a gain. There is a capital gains tax exclusion of $250,000 for individuals or $500,000 for married taxpayers filing joint returns. This exemption is available for gains incurred when selling a primary residence, if the transaction qualifies under IRS rules. However, even if you did not sell your house for a gain or used the money to pay off your mortgage, you are still obligated to report the transaction to the IRS. If you sell your second home or vacation home, there may also be associated tax obligations. To learn more about selling your home, see IRS Topic Number 701 Sale of Your Home.
Purchases For Use Outside Of California
You may not be required to pay California use tax if the only use of the vehicle in California is to remove it from the state and it will be used solely thereafter outside this state, and you do not register the vehicle in California with the DMV.
This exclusion only applies to a purchase that would otherwise be subject to use tax. This exclusion does not apply to a purchase from a licensed vehicle dealer subject to sales tax.
For example, you purchase a vehicle from a person in California who does not hold a dealer’s license or a California seller’s permit. Generally, use tax would be collected by the DMV at the time the vehicle is registered. However, use tax is not required if the only use of the vehicle in California is to remove it from the state and it will be used solely thereafter outside this state. A One-Trip Permit may be issued by the DMV in lieu of registration, for operating certain vehicles while being moved or operated for one continuous trip from a place within this state to another place outside this state.
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What Is Excise Tax
After the registration of your new vehicle, you have to pay the excise tax. The amount of it depends on the age of your vehicle and its original retail price. You can determine the amount you are about to pay based on the Indiana excise tax table.
For example, if you bought the two-year-old SUV for the original retail price of $25,000, you would have to pay an excise tax of $304. At the same time, if you bought this SUV when it was ten years old, your tax would be $36.
How Much Sales Tax Do I Need To Pay For My Motor Vehicle
Determining how much sales tax you need to pay depends on your home state’s laws and the state in which you bought the car. For instance: As of 2020, New York has a car tax rate of 4 percent plus local taxes, whereas next-door neighbor Massachusetts has a state car tax rate of 6.25 percent, with some local rates much higher. Knowing how much sales tax to pay when purchasing a vehicle also helps you to know when asking for financing from a lender.
Some states have reciprocal tax relationships, meaning they provide credits to each other whenever their residents pay sales taxes across state lines. For example, Arizona has reciprocal tax agreements with Oregon, Virginia, Indiana, and California. If a California resident buys a car in Arizona, they may be exempt from paying the Arizona sales tax, but they must still pay it in California.
Your state’s DMV most likely lists the state’s tax relationships with other states, so you should check their web page before making a purchase. Even if you visit a non-reciprocal state, you may be able to avoid paying the sales tax in that state if you give the car dealer proof that you intend to register your car in your home state.
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Choose Your Vehicle And Model
The sales tax will depend on the amount you pay to the seller. And that amount fluctuates from car to car. Therefore, youd have to choose a car model, if you havent already. Many online portals list cars for sale. Also, local car dealerships have such deals. So, go through the options available and select an option that falls within your budget.
A Way To Save Money That Works In All States
In some cases, paying sales tax is simply unavoidable. However, there are other ways to save money on a car purchase. For example, you can lower your financing costs if youre buying the vehicle with an auto loan. The average used car is around $30K. So, if youre financing that with an 8% APR auto loan, that will cost around $36,500. The same loan with a 5% APR, will save you around $2,500.
If you already have an auto loan consider an auto refinance.
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You May Be Exempt From A Use Tax In California If:
- The car was a family transfer sold between a parent, child, grandparent, grandchild, spouse, domestic partner or siblings .
- The car was a gift .
- You received the car through a court order.
- You inherited the car.
To apply for a use tax exemption, you will need to complete a Statement of Facts from the California DMV.
Buying A Private Used Car In Ontario
When buying a used car privately, it is important to know that there will be taxes applicable. But these taxes are not paid to the seller. The tax owed is due at the time that the transfer of the vehicle registration. As a rule, the amount of taxes will be 13%. If the transaction has taken place in Ontario.
It can be difficult determining what the actual cost will be. The amount is applied to the sale price for the vehicle. But the wholesale value of the vehicle is taken into account. Whichever of these produces the greatest value of the vehicle is the amount that is taxed.
There are cases where individuals are buying vehicles that are over 20 years old. There are more rules for determining the tax. It means that these vehicles will have to have an appraisal. It is something that those who are buying vintage or antique vehicles may have to deal with.
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Tax Obligations Differ When You Sell A Car
If you are a seller and you decide to sell your pre-owned car for less money than you bought it for, the IRS will consider this a capital loss and not impose any taxes on you. The rules are pretty different when you decide to sell the vehicle for a higher price than you bought it for this will be considered a capital gain or profit and will be something the IRS will look up.
On the other hand, if you are a buyer and decide to purchase a used car, you will have to pay sales taxes because you are becoming an owner of something valuable. However, you will not pay taxes to your dealer or the person you buy a car from but to your DMV when you register a car. But tax is not the only fee that will be added to your car price. Here are other fees you can count on:
- Title Transfer Fees,
Tax Obligations When You Sell A Car
If you sell a personal vehicle for a loss, the IRS is generally not interested in the transaction. However, if you sold the car for a profit, you should report that profit as a capital gain. The gain will be classified as either short term or long term, depending on how long you owned the vehicle. An IRS Schedule D is used to report your capital gains and includes worksheets to help you determine your adjusted cost basis, so you can properly report net gains or losses. If you put a lot of permanent work into improving the vehicle, you may be able to deduct some of those costs from the gain to help reduce your tax obligation. If you sell quite a few vehicles, the IRS may have reason to believe you are in the professional car sales business. Of course, if you are in the car sales business, youll want to report your income taxes, capital gains taxes, and business taxes appropriately to avoid issues with the IRS.
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How To Compute Tax
The Tax rate is based on the county and city where the vehicle will be primarily located and registered.
- For most Buyers, this would be their home address
- For commercial Buyers, this may be the address of their business.
It is good practice to use the Buyers Registration address for tax rate calculations .
Taxable portions of the Conditional Sales Contract include:
- The selling price of the vehicle
- Accessories installed and not included in vehicles selling price
- The labor portion of the Smog Fee
- Document Preparation Service Fee
Non-taxable items on the Conditional Sales Contract include:
- DMV fees
Purchase Of Electric & Hybrid Cars
According to international law, the purchase of hybrid cars is beneficial for people who are looking to buy a used car with sales tax exemption. If you import a used hybrid car then you didnt need to pay the full amount of customs duty government will offer you 50% off on the purchase of used hybrid cars. This law applied to increase the use of hybrid cars because hybrid cars are fuel-efficient and never discharge carbohydrate that is dangerous for the air and create pollution in the environment. Sales tax-paying system is different for electric cars and hybrid cars and its made just to increase the trend to buy electric and hybrid cars.
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Is Sales Tax Calculated Before Or After Down Payment
Are car down payments taxed? The answer is no: for most states, car sales tax is calculated before a down payment and is based off the total selling price of the vehicle. This total includes additional dealer-installed equipment or features such as remote start, window tinting, or any other vehicle upgrade package. Dealer documentation fees are rolled into this taxable amount as well.
For example, if you buy a car with an MSRP of $20,000 but decide to add on $500 rims, your total taxable amount will be $20,500. Your down payment will go towards this total but does not have an effect over the amount of taxes youll pay.
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How Sales Tax On Used Vehicles Works
Sales tax amounts on used vehicles vary depending on the state, ranging from around 3% to 8% or more of the vehicles purchase price. You may also have to pay an excise tax, which is another tax state and local governments can impose. If you purchase a used vehicle from a car dealer, youll likely take care of sales taxes, along with any other taxes due, at the dealership.
If you buy from an individual, youll likely pay taxes along with registration fees when you title your vehicle at the Department of Motor Vehicles. Be sure to get a bill of sale from the seller when you purchase the vehicle, as your sales tax is based on the purchase price.
You might think that paying for your used vehicle with a trade, such as building a new porch for a friend or swapping your compact vehicle for a truck, would eliminate sales taxes. Unfortunately, thats still a taxable transaction, and the amount of tax would be based on the service you provided or the vehicle you swapped instead of the vehicle sales price.
Do I Have To Pay Tax When I Sell My Car
If, like most people, you are trying to sell your used car for less than you spent on it, then you will not have to pay sales tax. The Internal Revenue Service considers all personal vehicles to be capital assets. Selling that vehicle for less than your purchase price is considered a capital loss, which does not need to be reported on tax returns.
So, if you bought your car new for $20,000, drove it for 10 years, and are now trying to sell it for $7,000, the transaction should be straightforward, especially if you do it online with CarGurus. But if you bought an older vehicle for cheap, made improvements, and are selling it for more than you originally paid, you will have to report that when you file your federal and state income taxes, and you may find you owe.
Selling a vehicle for a profit is considered a capital gain by the IRS, so it does need to be reported on your tax return. But figuring the dollar-amount of that gain is not as simple as comparing your purchase price to your sale price.
If you spend $7,000 on a car and an additional $1,000 on improvements but you sell the car for $7,000, it’s considered a capital loss, and you don’t need to pay tax on the sale. But if the original sales price plus the improvements add up to $8,000 and you sell the car for $10,000, you’ll have to pay capital gains tax on your $2,000 profit.
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Buy A Car In A State With No Sales Tax
One easy way to save money on sales tax when buying a vehicle is to live a state with no sales tax. While most U.S. states charge sales tax, the sales tax varies in each one. A few dont charge sales tax at all. The states with no sales tax are:
If you live near one of these states, you may have thought about making the trip to buy a car there and avoid the sales tax. Sadly, that will only postpone the payment of taxes. You might avoid paying sales tax at the time of the purchase, but you will usually have to pay sales tax later on.
Rules vary by state, but typically you have to register and use the car in the no-sales-tax state for some time for it to work. In the case of California, you have to pay sales tax when you register the car unless you purchased, and used, the car outside of California for at least 12 months. The taxes you owe will be based upon the purchase price of the car, minus whatever sales tax you paid to another state .
Note, however, that lack of statewide sales tax does not mean you can buy a car tax-free in all locations. The statewide average for local-area sales tax in Alaska, for instance, is 1.76%, and you could pay up to 7.5% in some locations.
If these states arent an option for you, there are some with a lower sales tax on cars. States with a tax rate below 5% are:
A savings must: avoid buying your car in the highest-tax states.
What Are The Tax Laws For Buying A Car In Indiana
When you buy a car, you have to pay Indiana sales tax on the purchase, plus excise tax to register the vehicle. The state charges a 7% sales tax on the total car price at the moment of registration. Although trade or dealer discounts are taken off from the sales price, any manufacturer discounts are not deducted from the sales price for tax purposes. For example, lets say you decide to trade your eight-year-old sedan for a two-year SUV that the dealer sells for $17,000. The dealer gives you $4,000 for your trade-in. This brings your taxable selling price down to $13,000, and you will owe $910 in sales tax .
Understanding Taxes When Buying And Selling A Car
When it comes to buying and selling a car, cutting out the middleman has plenty of perks. Buying a car from a private seller will usually result in a lower price tag. Selling one yourself will net you more money than what youd get for a trade-inbut buying or selling from a dealership also has its conveniences, such as getting help in figuring out any necessary tax payments.
The laws on taxes for private party used-car sales vary by situation and by state, and in some cases, even by city. It may seem hard to understand, but it’s not an insurmountable task.