Buying a used car can be a smart way to save money, but it can also come with a hefty sales tax bill. Depending on where you live and the price of the car, sales tax can add up to thousands of dollars. However, there are some legal ways to avoid or reduce sales tax on a used car, such as buying it in a state that doesn’t charge sales tax, or using an exemption or a rebate. In this article, we will explain how sales tax works on used cars, and how to legally avoid paying it.
How Sales Tax Works on Used Cars
Sales tax is a tax that is charged on the sale of goods and services, usually by the state and local governments. Sales tax rates vary by state and city, and can range from 0% to 10%. Sales tax is usually calculated based on the purchase price of the item, and is paid by the buyer at the time of the sale.
When buying a used car, sales tax is usually charged by the state where the car is registered, not where it is bought. For example, if you buy a used car in New York, but register it in New Jersey, you will pay sales tax based on New Jersey’s rate, not New York’s. However, some states may charge sales tax based on where the car is bought, or where the seller is located. Therefore, it is important to check the sales tax rules of your state before buying a used car.
Sales tax on used cars can be a significant expense, especially if you buy an expensive car or live in a high-tax state. For example, if you buy a $20,000 used car in California, which has a 7.25% state sales tax rate, plus an average local sales tax rate of 2.5%, you will pay $1,950 in sales tax. However, if you buy the same car in Oregon, which has no sales tax, you will pay $0 in sales tax.
How to Avoid Sales Tax on a Used Car Legally
There are some legal ways to avoid or reduce sales tax on a used car, depending on your situation and location. Here are some of the most common methods:
- Buy the car in a state that doesn’t charge sales tax. Five states don’t charge sales tax on used cars: Alaska, Delaware, Montana, New Hampshire, and Oregon. If you live in one of these states, or have a business or a second home there, you can buy the car there and register it there, and avoid sales tax altogether. However, if you live in another state and buy the car in a sales tax-free state, you may still have to pay sales tax when you register the car in your home state, unless you qualify for an exemption or a rebate.
- Use an exemption or a rebate. Some states offer exemptions or rebates for certain types of buyers or sellers, or certain types of vehicles. For example, you may be exempt from sales tax if you buy the car from a family member, a charity, or a government agency. You may also be exempt if you buy the car for a specific purpose, such as farming, church, or disability. You may also be eligible for a rebate if you trade in your old car, or if you buy a hybrid or electric car. Check with your state’s department of revenue or motor vehicles to see if you qualify for any exemptions or rebates.
- Negotiate the purchase price. Another way to save money on sales tax is to negotiate the purchase price of the car with the seller. Since sales tax is based on the purchase price, the lower the price, the lower the tax. However, you have to be careful not to underreport the price, as this could be considered tax evasion or fraud. You also have to make sure that the price is reasonable and realistic, based on the market value and condition of the car.
How to Save Money on Taxes When Buying a Used Car
Buying a used car can be a great way to save money, but it can also come with a hefty sales tax bill. However, there are some legal ways to avoid or reduce sales tax on a used car, such as buying it in a state that doesn’t charge sales tax, or using an exemption or a rebate. You can also negotiate the purchase price of the car with the seller, to lower the tax amount. However, you have to be careful not to underreport the price, or to violate any tax rules or regulations. By following these tips, you can save money on taxes when buying a used car, and enjoy your new ride.