Tax Tips on Buying a Used Car From a Dealer

Many consumers are distraught to find out they must pay tax on a used vehicle. The general idea is that full taxes have already been on the car and should not be paid twice. Unfortunately, that is not how it works. States collect sales tax on a vehicle each time it changes hands and that isn't likely to change. Despite this, there are ways to reduce your tax liability and protect yourself from being overcharged tax on a used vehicle

Sales Tax Tips

Paying sales tax on any vehicle -- new or used -- is unavoidable. Take certain steps to ensure you are paying the correct amount.

Despite their shady reputations, most used car dealers are decent people who try to do the right thing. Unfortunately, there are some bad apples in the mix, as with any industry. Although it is uncommon, some dealers take advantage of consumers when collecting sales tax. In this situation, the dealer overcharges you for the sales tax, pays the state the correct amount and pockets the leftover. This is not only an injustice, it is illegal -- tax fraud is serious business.

Protect yourself on your next used vehicle purchase by knowing your state and county sales tax up front. Do the math to determine if the dealer is charging the correct amount.

Trade-In Tax Credit

Most states offer a tax credit on your trade-in. Although the exact structure varies from state to state, the general rule is that you only pay taxes on the price difference between the vehicles, rather than the entire price of the vehicle you are purchasing. This usually applies to used cars as well as new. Some exceptions are Ohio (new only), California, Michigan and South Carolina. Check the laws in your state for clarification.

If your state offers a trade-in tax credit, reconsider selling your old vehicle and think about trading it in instead. Sure, you may be able to get an extra thousand or two by selling it, but once you combine that with the headache of selling a vehicle and the timeframe, trading in can be an excellent option.

As an example, use a trade-in vehicle with a value of $7,000. If the used car you are purchasing is $10,000 and your tax rate is 9 percent, you would pay $900 in taxes when purchasing the used vehicle. By throwing your trade-in into the mix, you reduce your taxable value to $3,000 and cut your tax liability to $270.

Since tax is calculated on price rather than value, negotiating the lowest price will not only save you on the purchase price, it will save you on taxes. The same principle applies to your trade-in.