Like many other belongings treated as personal property, vehicles are subject to a handful of taxes. When you purchase a new or used car, be prepared to pay a number of different taxes. Whether or not you have to pay an annual property tax on your vehicle depends on the state the vehicle is registered and used in. The amount of tax you may owe is generally based on the value of the vehicle. In order to properly plan and save for these costs, it is important to understand the details of each vehicle tax you may owe.
Depending on the state and city you live in, you could see a range of different types of car taxes. There are even some cases where these taxes are required to be paid to both local and state governments.
Sales tax is one of the first taxes you’ll come across. It makes an appearance when you first purchase or lease your vehicle. This tax applies any time a vehicle’s ownership changes hands due to a purchase. Some states provide exemptions for transfers between close family members and vehicles given as a gift. This sales tax is generally applicable to any vehicle purchased including cars, trucks, tractors, and motorcycles.
Personal Property Tax
You may also find that you owe a personal property or excise tax depending on your state or municipality of residence. Personal property taxes are based on the current value of your vehicle and are paid once per year. About half of all U.S. states currently charge a vehicle property tax. Other annual taxes are added onto that in some municipalities.
For instance, the state of Massachusetts charges a standard sales and use tax, and the city of Boston has residents pay an additional annual excise tax of $25 per thousand dollars of a vehicle’s value. These excise and personal property tax bills are generally sent out and must be paid by a deadline.
If you are going into a year with the same vehicle as the year before, your tax bill depends on the car’s value and the location it is normally parked on January 1st of the year. A vehicle qualifies to be taxed by a city or county if it is registered to an address or is regularly parked within the jurisdiction.
Ad Valorem Tax
Not all vehicle taxes are assessed based on the value of your vehicle. Some states charge a fixed annual registration fee as well. Taxation based on the value of personal property or the value of a transaction is called an ad valorem tax. Take note and be mindful to use only the portion of the tax based on your vehicle’s value for deduction purposes.
In order to best understand what taxes you will end up owing on your vehicle, it is best to know both the state laws and local regulations for vehicle taxes. To begin looking into this in your residence, start with your state’s Department of Revenue. Your local DMV can also be a great resource.
How Are Vehicle Taxes Calculated?
Your car’s tax amount can be influenced by a number of factors. In general, car tax is calculated by multiplying the tax rate by the total value of your vehicle. The specific formula will depend on which type of tax you have to pay and which tax rates apply to your state or municipality.
Calculating the Personal Property or Excise Tax for a Car
Much like your state or municipality chooses to charge an excise or personal property tax on your car, it also sets the specifics on how your vehicle is valued. This can vary exponentially from location to location. For instance, the Massachusetts Registry of Motor Vehicles sets vehicle values used for calculating excise tax in Boston.
The J.D. Power’s National Automobile Dealers’ Association Official Car Guide is used to determine a vehicle’s value in Fairfax County, Virginia. For new cars, the suggested retail price is often used to determine value. Once a car’s value is determined, you will pay the tax rate applicable to that value. For leased vehicles, similar rules apply; the property tax is either included in the overall vehicle payment or added as a separate fee.
Why Do You Have to Pay a Car Tax?
Take comfort in knowing that your vehicle taxes are being used for the greater overall good of your community and will benefit you in the long run. Your tax payments are used for different projects that are determined by your individual county or state. Taxes can be used for road maintenance, construction, upkeep, and more. A jurisdiction’s tax funds can be utilized for repairing pesky potholes in older roads or for generating more efficient traffic patterns in congested areas. If you are interested in learning more about how your tax money funds your local area, contact the lawmakers and officials in your town.
A Vehicle’s Taxes Decrease Each Year
Some good news about vehicle tax is that since it is based on the resale value of your car, your vehicle taxes will decrease as your vehicle’s value depreciates. Some vehicles lose their value quicker than others. Because of this, there is no specific guideline to how your vehicle tax bill may decrease in future years. A number of states also offer exemptions and discounts for specific things like high-mileage cars. Research the laws and regulations in your current residence to see if you qualify for any of these discounts.
Tax-Deductible Property Taxes
Another bit of good news is that personal property taxes based on the value of the underlying property can be deducted. This includes vehicle property taxes. With half of U.S. states charging a personal property tax on vehicles based on vehicle value, the average annual vehicle property tax cost is $423.
If you reside in New York, New Jersey, Florida or Texas, you are not required to pay an annual vehicle property tax. In other states, it can be especially expensive to own and upkeep a vehicle. In Rhode Island, the average driver pays $1,133 per year, while Virginia averages $962, Kansas averages $905, Mississippi averages $743, and Connecticut averages $630. While places like Maryland and Washington D.C. do not enforce a personal property tax on personal vehicles, they do have business personal property taxes.
The History and Repercussions of Vehicle Tax
Local governments have held the authority to tax vehicles based on their value since 1926. The state government has taxed vehicle owners since even before that. In fact, all things considered property including horses and wagons, were once taxed.
If you decide not to pay your vehicle property tax when it is due, you are risking a handful of possible repercussions. Once your vehicle is registered, a motor vehicle excise tax has to be paid to the city in which it is registered in. If this tax is not paid in the requested period of time, your registration and license can be marked for non-renewal.
You may also begin to be charged interest on your delinquent taxes. This interest generally accrues monthly, meaning you will begin to see a steady increase in the balance you owe to your local government until you take the necessary steps to pay off your bills. If you are moving from one jurisdiction to the other, it is important that you contact your previous city or county of residence and notify them that you should no longer be taxed. Neglecting to do so may result in a mess of improper fines that you have to get sorted out.
Adjustments and Exemptions
Owners are given the right to challenge their vehicle’s determined value. Adjustments are sometimes made due to the number of miles on the vehicle or other glaring issues that affect its value. If the deadline for payment is approaching, it is better to go ahead and pay the bill in order to avoid additional costs for late payment.
Exemptions can be provided in some cases where the state constitution grants relief to government vehicles, churches, and active duty military members. Local governments have the option of offering tax exemptions to people over 65 years of age as well as to some devices of motor transportation like ATVs, mopeds, and off-road motorcycles.
Oftentimes, vehicle registration fees are based on the value of the vehicle and a combination of other factors. Only the portion of the registration fees that are based on the value of the property are allowed to be deducted for tax purposes. You may receive an annual vehicle registration statement that notes what amount of the registration fee is eligible to be deducted as personal property tax.
Always Keep Good Records
Remember to keep good records of all your vehicle expenses and track how much personal property tax you have paid during each year. Understanding all of the taxes attached to owning a vehicle can prevent you from running into troublesome problems down the line.