Published: February 24, 2020.
Disclaimer: We hope you found this post helpful! Nothing in this post constitutes professional, tax or financial advice. Please conduct your own research before transacting and consider talking to a qualified professional about your unique circumstances.
Buying a new vehicle is a big investment in more ways than one. When it comes to paying sales tax, this amount is often listed on the final purchase agreement. It often adds a substantial increase in the overall price of your new vehicle. Some states charge more on vehicular sales tax than on other major purchases.
The good news? If you meet certain conditions per the IRS, you may be able to deduct the sales tax from your vehicle purchase.
You’ll Have to Itemize
One of the conditions is that it will be necessary for you to itemize your deductions on your federal Form 1040. The deduction, if you qualify for it, must be claimed on Schedule A when you prepare your tax return. Be aware that this might not be the best option for you. If the standard deduction is more than the sum of all your allowable itemized deductions, you may want to go with what would save you the most money.
Claiming the standard deduction or itemizing is a choice you have to make. You can’t use both, so it’s important to determine which option would offer the best savings for you.
Vehicle Sales Tax Deduction
While there is a general sales tax deduction you could use if you itemize deductions, there’s also a deduction for your state and local income tax. Keep in mind that you can only use one.
If you use the general sales tax, you may deduct the total cost of the item, which includes the sales tax you paid.
If you go with the state and local income tax deduction on your vehicle purchase, you can only deduct the state and local taxes. Deducting sales tax is only a good idea if the amount of local and state tax you paid was more than what you paid in local and state income tax.
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Local and State Income Tax
If you elect to deduct the local and state income taxes you paid, keep in mind that you have to claim the deduction in the year the taxes were paid. If either of the following is true, you’ll get a larger deduction for the current year:
- You made estimated tax payments.
- The last payment was made in December instead of January.
If neither of these happened in the last year, claim the deduction in the current year or the year you paid it. Be sure to include the amount of local or state taxes you owed and paid in the current year. If you owed such taxes in the previous year, you probably paid the same bill in the current year.
You can also choose to deduct your local and state sales taxes instead of local and state income taxes. If you paid more in sales taxes than income taxes, you might benefit from this option.
For those who live in states where there’s a state income tax, you likely paid a higher amount in income tax than sales tax. However, if you’re supported by a Social Security income or receive federal or state pensions, you may be better off using the sales tax deduction since those are not typically taxable as state income.
Claiming the Vehicle Sales Tax Deduction
Now it gets a little trickier. The sales tax you paid has to be the same rate as the general sales tax rate in order to claim this deduction. If not, you can only take the general sales tax rate for your deduction.
You have two choices when deducting vehicle sales tax.
Keep all your sales receipts and be sure to deduct the actual sales taxes paid through the year. You can also determine your deduction by using the IRS sales tax tables. Based on your income, the tables calculate your estimated sales tax paid. The tables don’t include bigger purchases, so once you’ve found your amount in the table, add the sales tax paid for any of the following:
Airplanes
Boats
Cars
Motor homes
Motorcycles
If the vehicle you bought was for a business and you’ve deducted the sales tax on the business tax return you’ll be filing on Schedule C (Form 1040), then you can’t deduct the sales tax on Schedule A (Form 1040).
A limit of $10,000 ($5,000 if MFS) is imposed on the amount of sales tax you can claim from 2018 through 2025. The $10,000 limit includes the total amount you can claim for personal property taxes, real property taxes, and local and state income taxes or general sales tax, whichever you decided to use.
Can You Deduct New Car Sales Tax If It’s Financed?
You have to pay sales tax in many states no matter if you purchased the vehicle new or used from a dealership or a private party. You’ll need to pay the sales tax regardless if you paid for it outright or you arranged for financing, even if the sales tax was rolled into the total loan balance. Leased vehicles are treated the same way. The only states that don’t charge sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon.
You can deduct your sales tax on vehicle purchases whether the purchase including the sales tax was financed or not. Again, you’ll need to itemize your deductions to do this. The tax is charged to you in the year the vehicle was purchased even if the payments from the financing are spread out over many years. Keep in mind that you can only take the deduction in the year of the purchase. It can’t be used through the life of the loan.
Does Your Trade-In Get Deducted From the Sales Tax on a New Car?
If you trade in your old car to buy a new car, the sales tax you pay will depend on local and state sales tax rates and whether the taxable sale price is calculated before or after the trade-in allowance was subtracted. In 42 states, the sales tax you pay will be on the value of your new vehicle minus the trade-in allowance amount. Oregon has no sales tax, so if you buy a vehicle there, you pay no taxes.
In California, Hawaii, Kentucky, Maryland, Michigan, Montana, and Virginia, you pay the sales tax rate on the full value of the new vehicle you’re buying.
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If You Buy a Car in Another State, Where Do You Pay Sales Tax?
If you end up buying a car out of state and bring it home to the state where you reside, you’ll need to do your homework on how sales tax will work in that situation. First, determine which state gets the sales tax since the laws are different for each state. Know the sales tax laws of each state before you make your purchase to protect yourself from having a tax evasion fine levied against you.
Normally, if you buy a vehicle in a state other than the one where you live, the dealer collects the sales tax and sends it to the pertinent agency in your home state. That’s convenient as it keeps you from having to deal with trying to discern the tax laws of each state.
Ensure that the sales tax was paid before you register the new vehicle at the Department of Motor Vehicles in your home state. Often, they will check to make sure the sales tax bill was paid. Many times, the sales tax charged to out-of-state buyers is the same that would be charged to those who lived in the state of purchase. Check to make sure you cover any shortage if your resident state’s tax rate is higher than that of the state where you bought the vehicle.
To assist in the process, ask for a bill of sale for the vehicle you’re buying that includes the sales tax and have it ready when you go to the DMV. This can help you avoid being billed for sales tax again in the event that the dealer didn’t send the right paperwork to your DMV.
There are around 10,000 sales tax jurisdictions in the United States. There are cities, counties, and other districts included in that. Each of those jurisdictions has its own tax laws, so you may also have to pay local taxes on your new vehicle in addition to the state sales tax amount.
How Do Vehicle Sales Taxes Work With Rebates and Incentives?
If you receive a rebate or incentive on a vehicle you’re buying, it will reduce the price of the vehicle. However, most states charge sales tax on the full price of the vehicle prior to the rebate or incentive being applied. If you pay $35,000 for a new truck and get a $1,000 rebate, you’ll pay $34,000 for the truck. The sales tax in most states, however, will assess the tax for the entire $35,000 sales price.
