Car leasing and sales tax
There are only 5 states in the country that don’t charge sales tax, so if you live in Alaska, Delaware, Montana, New Hampshire, or Oregon then you don’t need to worry about the information here. If you don’t you’ll have to pay sales tax whether you purchase or lease the vehicle. You may even be subject to additional taxes if you live in an urban area.
Each state is different, depending on where you purchase you may be looking at different rates. Even states, like Delaware, don’t have a sales tax but do have a 4.25% document fee. A simple google search for your particular state will provide the correct sales tax so you can add it to your total.
Sales taxes are not only in different percentages, but they can also be applied differently. Like we discussed about the Delaware system, they tax you on a spereate “document fee.” So when you do your search, be sure to include and additional fees that may be included because of the unique laws of your state.
Some states charge you tax on your initial down payment, some of the depreciation of the lease, and some may tax you the full amount upfront. Knowing how the tax is applied in your state will also prepare you for the final cost of your lease. In most cases, your tax will be rolled in with your monthly payments.
With so many variables, it’s crucial to understand how sales tax will be attached to your lease, how much you’ll have to pay, and when you’ll need to pay it. Be sure to get a full explanation from the leasing company or dealer, or check out your state’s department of motor vehicles website.
Deducting sales tax on a car lease
In most cases, there is no escape from the taxes you’ll have to pay on your lease. The good news is that it’s completely deductable. The SALT deduction allows taxpayers to deduct state and local taxes. Of course, this will vary from state to state. Some states allow property tax, income tax, and sales tax to be deductible.
In December 2017, Congress passed tax reform legislation that capped the SALT deduction at $10,000. The change took effect starting with the 2018 tax year. You can now deduct either state, local and foreign property taxes, state and local real estate taxes, and either state, local and foreign income taxes or state and local sales tax. However, you can’t have it all. You must choose either sales tax or income taxes to deduct. And you must itemize in order to take the deduction.
Now you have to figure out which combination works best for you. This may best be handled by an accountant unless you want to go over the details about all the ways you can claim deductibles. Not to mention the unique twists and turns within the law depending on your state
For example, if you own a home and live in a state with high property taxes, you may decide that itemizing makes sense for you. And while you’re deducting state and local property taxes, you may opt for deducting sales tax as well, especially if you live in a state that doesn’t have a personal income tax.
However, if your total itemized deductions don’t exceed the new standard deduction for 2018 ($12,000 for single filers and $24,000 for those married filing jointly), you may choose not to itemize at all — in which case you can’t deduct the sales tax you pay on your vehicle lease or purchase.