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You’ve been eyeing that shiny new toy on four wheels for months, and you’ve finally decided to reward yourself (and all your hard work). You march into your local car dealership with some hard-earned money from your trusty piggy bank and high spirits in your back pocket. You’ve got the cash, you’ve got the attitude, and nothing can stop you from buying the car of your dreams.

You sit down with the salesman and get ready to sign off on all the paperwork. But then you spot the extra dollars tacked on to your final price, and your wallet visibly shrinks. What just happened?

Before you bid goodbye to those dreams of driving down the wide open road with the breeze in your face and your worries in the wind, we are here to help you understand what exactly a car tax is.

What’s a car tax, and why do I have to pay it?

First, car taxes do exist, and you have to pay them no matter what. “Nothing can be said to be certain, except death and taxes,” as the old saying goes. You can do the math yourself with a tax calculator, but depending on the state in which you live, you still need to factor in your state sales tax.

Here’s a quick rundown of the various fees involved when you’re making a vehicle purchase. The registration fee is charged by your state when you register the car under your name at the Department of Motor Vehicles. Depending on the state, some are flat rates, while some have rates based on the age, the weight, or the value of the car. If you skip a due date or two and register your vehicle late, you might get charged an extra fee.

The license plate fee can be included or excluded from your registration. Auto insurance also depends on a variety of factors, depending on the state. There is also a fee for title transfer, a documentation fee from auto dealers, and emissions or inspection fees. There’s a whole bunch of fees just waiting to pop up on your final bill whenever you purchase a car.

To save yourself from having a cardiac arrest from any surprise fees on the final price of your vehicle, expect a chunk of your savings to head straight to those taxes. The tax amount can vary between states, but the average is 5.75 percent. The figure can range from below three percent to above eight percent when you’re buying or leasing a motor vehicle, so make sure you account for every penny.

Certain vehicles have excise taxes. If you plan on buying a new car or a used car that doesn’t quite make the cut when it comes to U.S. fuel economy standards, you may have to pay for “gas guzzler” taxes. If your motor vehicle has a heftier price tag than average vehicles on the market, you may also have to pay luxury taxes.

Depending on the state in which you live, you can save a little bit on the sales tax if you trade in your old vehicle at the dealership. You can calculate the difference between the trade-in value of your old car and the purchase price of the new car. With that amount, the dealership will compute the sales tax, which is definitely less than if you don’t have an old vehicle to trade in.

For instance, in Georgia, the sales tax rate is approximately 8 percent. If you plan on buying a new car worth $40,000, you can opt to trade in an old vehicle worth $10,000. The difference between the two is $30,000. Thanks to your trade in, this means that your sales tax will only be 8 percent of $30,000, which is $2,400 and definitely a load off for you.

Delaware, Alaska, Oregon, Montana, and New Hampshire do not have a sales tax. You should still check your local dealerships to confirm, just to be sure.

How do I calculate my car tax?

We’ve already established that a car tax is inevitable, apart from registration fees on a new or used vehicle. But do you know how to calculate it to avoid any extra stress when it comes to paying the bill?

The tax rate depends on the value of your car. It can have three forms: the sales tax, the excise tax, and the personal property tax. State and local law dictate the exact amount you need to plan for. With sales taxes, it can either be due when you purchase the car or when you register it at the DMV. Normally, it’s due whenever the ownership changes or there is a title transfer, whether between private parties or between you and a dealer.

As for the personal property tax, it is normally paid every year, depending on your car’s current value. Annual taxes can be common in some municipalities. In Boston, for example, car owners must pay an excise tax of $25 per thousand dollars every year, depending on the value of the car. This is on top of the Massachusetts use tax. This vehicle tax must be paid strictly by the deadline set by the tax bill.

While it might seem depressing to pay all of these vehicle taxes on top of the sales price, it’s actually not that bad. In general, you can calculate the vehicle tax by multiplying the tax rate by the value of the car based on the state. For the sales tax rate and the use tax in Virginia, for instance, you need to pay 4.15 percent of the gross sales price of your car or $75, whichever is higher. In New York, for example, you need to pay a 4 percent state sales tax.

Sometimes you might need to pay an additional county or local tax, which can go up to 4.5 percent. If you pick a good dealer, you can score cash incentives or manufacturer rebates to reduce your out-of-pocket cost, like a $1,000 cash rebate on a $10,000 vehicle (taxes are computed before the rebates are applied to the sticker price, though).

The excise tax or the personal property tax will factor in how the Department of Motor Vehicles values your car. The J.D. Power’s National Automobile Dealers’ Association Official Car Guide is a definitive reference for determining the value of a car. You can inquire about the exact fees at the Department of Revenue in your state or when you go to register your vehicle at the DMV.

How can I ease the tax burden a little bit?

If you use your car for business purposes, you’re in luck. The Tax Cuts and Jobs Act (TCJA) offers business owners first-year depreciation breaks for passenger vehicles used over 50 percent of the time for business purposes.

Meanwhile, the Alternative Motor Vehicle Tax Credit offers benefits for owners who own qualified fuel cell motor vehicles—these refer to cars powered by cells that have the ability to convert chemical energy into electricity. Examples of these vehicles include the Mercedes-Benz 2012 F-Cell and the Honda 2012 FCX Clarity Fuel Cell Vehicle.

On top of that, the Qualified Plug-In Electric Drive Motor Vehicle Credit offers breaks for cars that run on electricity from a battery that can be recharged. To give you an example of how big this credit can be, if you purchased an EV (Electric Vehicle) beginning on January 1, 2019, the IRS tax credit is $2,500 to $7,500 per new unit.

If your vehicle has been modified for use or to transport people with disabilities, these cars can be exempt from motor vehicle sales and use taxes. These are cars that are modified for orthopedic conditions and include additional hand controls, raised ceilings, accelerator pedals, wheelchair ramps, and so on. You can fill out a Title Application/Tax Statement form to receive the tax exemption detailing the circumstances of the modification.

For foreign missions, there is also an exemption of sales and use taxes when it comes to purchases or leases. This should be on the basis of the diplomatic or consular status or accreditation of the foreign mission as authorized via the Motor Vehicle Tax-Exemption Letter. This is issued by the Office of Foreign Missions (OFM).

Conclusion

Seeing the total sales tax on the final bill of your vehicle might feel like you’re adding salt to an open wound, but it’s all a matter of perspective. These tax dollars go to proper government programs, and everyone has to pay them.

If you think you can evade these taxes and get away with the perfect crime, penalties and interests will only add up as time goes by—not to mention you could actually end up in jail when push comes to shove. It’s always best to be a law-abiding citizen and live a carefree life, don’t you think?

Now that you know all the ins and outs of car taxes and how they operate, you can plan ahead and set aside your budget accordingly. Prepping yourself financially and emotionally not only saves you from an emotional breakdown in the middle of your local car dealership, it will also make you tax-savvy each time you need to go through subsequent vehicle registrations and registration renewal.

So, go ahead and sign those papers—your next stress-free road trip awaits…

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