Understanding Tax on a Leased Car
Many states and municipalities charge sales on tax leased cars, which can increase your total leasing costs and monthly payments.
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Depending on where you live, you may have to pay taxes when you purchase a new car. But did you know taxes usually still apply when you lease a car, too?
Dealers and financing companies charge several fees when you agree to lease a vehicle, and you may discover that state and local sales taxes are among the fees included in your lease. Before you prepare to lease, here are some important details about the potential impact of tax on a leased car and how this could affect your overall leasing costs.
Do I Have to Pay Tax on a Leased Car?
In many areas, the answer to this question is yes. Most states charge sales tax on a range of transactions, including buying, selling, and leasing a vehicle. However, these taxes vary by jurisdiction, and some states have higher sales tax rates than others.
The top six states with the highest sales tax rates on cars are:
- Nevada (8.25% on average)
- Kansas (7.50% on average)
- California (7.25%)
- Indiana (7%)
- Rhode Island (7%)
- Tennessee (7%)
Meanwhile, five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—don't currently charge any sales tax, including on vehicles.
However, if you lease a vehicle, it's not just the state sales tax you may have to pay. In some cities and towns, you'll also need to pay municipal and local taxes, which could be at least an additional 1% in cost in most municipalities. For example, the state of Colorado has a base sales tax rate of 2.9%, but if you live in Boulder County, you'll have to pay another 3.86% in sales tax.
If you're leasing a car, your state's sales tax is not the sole focus. It's also important to be mindful of sales tax in your city or town, and to understand how it may impact your overall leasing costs.
How Do I Pay Tax on a Leased Car?
How states apply sales tax on a leased vehicle also varies. In some states like Texas, you must pay taxes on the full amount of the vehicle upfront, whether you buy or lease. In other states, you may only have to pay taxes on your monthly lease payments. Other states, like Massachusetts, even charge taxes on the down payment on a car lease.
Can I Get a Deduction on the Sales Tax for a Leased Car?
You may be able to deduct sales tax on a leased car using the state and local sales tax (SALT) deduction. With the SALT deduction, you can deduct either property taxes and income taxes combined or state and local sales taxes, but not both. This deduction is capped at $10,000 for the 2022 tax year.
If you itemize deductions, you may be able to get this tax benefit. However, this means you'll have to keep accurate records of all the sales and local tax you paid throughout the year, including on your lease. Once you add everything together, you'll need to determine whether it makes more sense to itemize or take the standard deduction. For example, the 2022 standard deduction for single tax filers is $12,950, but if your itemized deductions are above this amount, then you'd get more of a tax break by itemizing.
If you use your leased car for business, you may also qualify for a deduction. The rules around this can get complicated, but you can either use the standard mileage rate or deduct your actual expenses and operating costs for the vehicle. The latter method is known as the actual expense method. If you use the actual expense method, you can only deduct business-related operating costs for the use of your vehicle. If you choose to use the standard mileage rate, you can't switch deduction methods and must use it for your entire lease term.
We recommend consulting with your tax professional to figure out what’s best for your situation.
Understanding Your Tax Liability When Leasing
If you're unsure of how much sales tax you have to pay on your lease or how this might affect your monthly payments, talk to your dealer or financing provider. It's also wise to make sure you have this information in writing. You can visit your state or town's department of taxation website or call the department to find out what the current sales tax rate is in your jurisdiction. This is especially true if you live in a state that requires sales tax to be paid in full upfront.
Exercising due diligence beforehand can help you better understand how much you'll pay in taxes, and ensure that you're financially prepared to handle the total costs of leasing a vehicle.
