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When buying a new or used car, it is easy to focus on the sticker price of the vehicle and forget about additional expenses, such as your sales tax. Though tax rates vary by state and city, the formula to calculate your vehicle tax is: purchase price times the sales tax percentage.
Sales Tax Example
The sales tax you pay is based on auto tax regulations in your municipality and is not typically influenced by whether the car is new or used. Assume your sales tax rate is 6 percent and the purchase price of the car is $20,000. Your sales tax would be $20,000 times 6 percent, which equals $1,200.
Price Discount Factors
Certain factors reduce the net sales price on which your tax is calculated. If you trade a vehicle in, for instance, the trade-in allowance is subtracted from the agreed-upon price in some states. Thus, when negotiating your deal, it is usually better to have the value of your car factored as a trade-in rather than selling it separately where the allowance isnt applied. Rebates are another common deduction. Some dealers offer rebate incentives to increase volume for a period of time.
Assume the dealer offers you a $5,000 trade-in allowance on a $20,000 vehicle and you participate in a $1,000-rebate offer. In this scenario, the formula to calculate the sales tax basis is $20,000 minus the $5,000 and $1,000 allowances, which equals $14,000. Multiply $14,000 times your 6 percent tax rate, and your total sales tax is $840. By reducing your tax basis, you saved $360 in sales tax.
Additional Cost Considerations
In addition to sales tax, you pay the fees for vehicle registration and licensing. When buying through a typical dealership, you pay these fees directly to the dealer as part of your sales agreement, and the dealership processes the paperwork. On a private sale, you file these documents with your local vehicle tax office and pay the tax, title and registration fees at that point.
Tips
When you take out a loan for the vehicle purchase, your taxes and fees are worked into the loan payments. Making a sizable down payment reduces your monthly payments, and can save you on interest.
