Car manufacturers often advertise lease offers that seem like great deals. However, these advertised prices typically don't factor in the sales tax that will be charged. Sales tax percentages and payment structure are determined on a sate-by-state basis. Auto lease payments include the sales tax in some states, while in others the tax is paid up-front.
Leasing a vehicle is essentially renting it for a certain period of time. Generally, a lease period extends for two or three years. At the end of the period, you can give the car back to the dealer or choose to buy it. With a lease, you're not paying on the entire price of the car, only a portion. This is why lease payments are substantially lower than if you wanted to buy the same car. There are strict terms and conditions to a lease. The first being the allowed mileage. If you go over the limit, you'll be charged a fee. Additionally, the car will be inspected for damage and you could be responsible for the repairs.
The monthly lease payment is calculated based on the capitalized cost you negotiated with the dealer. You'll pay the difference between the negotiated cost of the car and the estimated value it will be worth at the end of the lease term, known as the residual value. The final figure is simply divided by the number of months in the lease to reach the monthly payment amount; then the interest rate is factored in.
State-Specific Sales Tax
The sales tax on a lease depends on what state and county the vehicle is registered in. The majority of states assess and include the sales tax on each monthly payment. For example, if the monthly lease payment is $300 and the sales tax is 8 percent, the total payment is $324. However, some states calculate the sales tax differently. Arkansas, Illinois, Maryland, Oklahoma, Texas and Virginia calculate sales tax on the full price of the vehicle with the payment due at signing. Other states, such as New York, charge the tax based on the total lease payments.
Income Tax Implications
When a leased vehicle is used for business purposes, the entire payment, including sales tax, is eligible for deduction on the business' federal income tax return. If the car is used for mixed purposes, business and personal, the amount of business use is determined to prorate the deduction amount. Individuals can deduct only the tax amount paid on a lease, if you're filing itemized deductions.