We talk a lot about the costs of leasing a car, wear and tear, and of course mileage. But something that always seems to sneak past analysis is State Taxes and Laws. Here, we will go into detail about how a state’s unique laws and taxes can harm or help your lease agreement.

Each state has its own tax laws and rates, before signing your lease, make sure you factor in how much taxes you will have to pay. Taxes can add an extra couple of hundred dollars even thousands depending on your agreement and state.

How Lease Payments Are Taxed

There is absolutely no way to avoid state taxes, so the first thing you must do is find your states particular sales tax rate. Take all your costs then multiply your total by the tax rate appropriate for your state. Just like when you’re buying groceries, you total everything together then apply the sales tax.

Here’s where it gets a little complicated. There is a difference in some states regarding when you actually pay your taxes. In some cases the entire value of the vehicle is taxable and others state only require monthly lease agreements to be taxed. In this case, leasing your car has the additional benefit of not having to pay the lump sum tax on a purchase.

The difference between states can be drastic. For instance, Texas requires you to pay the sales tax on the full value of the vehicle. Contrast this to Ohio where you have to pay the tax on the cost of the lease up-front.

State Tax Deductions

All taxes you pay on your lease can be deducted from your annual tax payment. This only applies to your state and local tax however, not federal. You can either deduct or you can claim your state income tax.

If you choose the standard deduction, then you are no longer able to deduct sales taxes. This makes sense because if you are able to deduct the sales taxes it would end up being higher than the state sales tax anyway.

Getting back as much as possible on your taxes requires two things.

  1. You need to itemize your deductions.
  2. Deductions on all sales taxes must be greater than your state income tax.

This process only makes sense if your combined local and state tax outweighs your state income tax.

Federal Tax Deductions

There are some circumstances in which you can get a tax deduction on your federal income taxes. The SALT deduction allows some taxpayers to deduct certain taxes like sales, income, or property taxes. 

As of 2018, the SALT deduction has been capped at $10,000. Even though there is a cap, the new changes to SALT have included more options for deductions. Instead of only being able to tax your local property or sales tax, you can now include foreign sales and property taxes. This will be beneficial for a few, but if you’re one of them, it’s worth being aware of this change.

To get a better understanding of what exactly is going on with taxes and your state, check out this graph created by Forbes. The graph includes all relevant tax information, registration fees, and the average fee charged by dealerships.

Ultimately

It seems the best thing you can do is to lease a car that lets you pay sales tax on a monthly basis. However, it’s not always clear what fees are being hidden by the dealership. This is where the term “hidden fees” comes from. One minute you think you’re saving a bunch of money, next thing you know you have a mountain of fees to cover.

That’s why your best option for leasing a car is by going through Carvoy.com. At Carvoy, we make sure all costs are clear and upfront, there will be no surprises. Feel free to reach out to us at any time for further clarification on the topics discussed in this article.