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Car Tax

Car Tax What is the Car Tax?

When you are ready to purchase a car, whether new or used, you must be prepared to calculate the required additional costs and taxes that will be added on the agreed upon purchasing price.  Car tax rates and requirements vary by each state, so it is important that you find out the tax rates for your state before purchasing a vehicle.  

How Car Taxes are calculated

Numerous car taxes may be applicable on your purchase depending on certain factors, such as where you purchase your vehicle, which state you register your vehicle, whether it is a new or used vehicle, whether a luxury tax is applicable, and whether tax credits are available for a hybrid vehicle.   

 1. General taxes you will be subject to

Almost every state applies a sales tax for the purchase of a car.  These sales taxes may be the same rate as the general sales tax, or may be an explicit rate for car sales.  Most states will apply a sales tax of between 4% to 7%, which will be calculated by the sale price.  While you may not often calculate sales tax in a purchase, this relatively low percentage can become a very large number when purchasing a car.  For example, purchasing a vehicle for $10,000 will result in a $500 tax if the tax rate is just 5%.  

 2. Registering with the DMV

The purchaser of the car will always pay the tax and your state's DMV may even require that you pay such taxes before allowing your vehicle to be registered.  This rule will apply whether you purchase your car from a dealer or from a private party.  Many states, in an effort to thwart underreporting the sales price, will require the tax rate to be based on a blue book value of the vehicle.  

3. Yearly Asset Taxes

Some, but not all states, will also require a yearly car tax on the ownership of a vehicle.  This amount must be calculated before purchasing a car, as residents of these states will be responsible for paying these taxes on their car value every year they own it.  These taxes should be calculated along with your yearly insurance and registration requirements for your state.  

 4. Other tax issues.  

Additionally, any new vehicle that is purchased for over $57,180 is subject to a federal luxury car tax that is due immediately upon purchase of the car.  The luxury car tax rate will be determined by the amount over this minimum price.  The luxury car dealer can help you calculate the luxury tax for your vehicle.  Hybrid vehicles also have special tax deductions.  Federal tax credits can be applied to the owner's income tax as a deduction, up to $3,400 per year.   

Cars have become a necessity for most Americans and it is important that when you make such a purchase you understand all of the taxes and fees that will be applicable.  If you are unsure of how much a vehicle will cost you, speak with a tax and car sales professional in order to assure you purchase a vehicle that fits your needs as well as your budget.  

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