The sales tax when buying a new car can add a significant amount of money to the total cost. Pay 7 or 8 percent or more tax on a $30,000-plus vehicle and the tax adds up to thousands of dollars. However, most states allow a credit for the value of your trade-in, reducing the total amount of sales tax to be paid.
New Car Sales Tax
Most of the states which have sales tax -- only four states do not -- tax the sales of a car purchase on the difference between the price paid for the new car and the value given for the trade-in. For example, if you're buying a new car for $30,000 and getting $10,000 for your trade, you would pay sales tax on the $20,000 difference. According to the Edmunds.com website, 40 of the 46 states with sales tax allow the trade-in credit.
States With No Credit
The seven states that do not give sales tax credit the trade on a car purchase are California, Hawaii, Kentucky, Maryland, Michigan and Virginia. The District of Columbia also does not allow the trade-in sales tax credit. In these states, you will pay sales tax on the full purchase price of a new car.
Trade In Value Bump
The sales tax credit increases the value of a trade-in above the dollar amount the dealer will pay for the car. If the dealer will give $10,000 for your trade and the sales tax is 6 percent, the total value of the trade is $10,600 against the cost of the new car. The extra sales-tax credit may make the difference between trying to sell your trade privately or letting the dealer get your current car as a trade.
Check With Leases
In many states, sales tax is handled differently if you're leasing your new car rather than financing or paying cash. Sales tax is often charged on the monthly lease payments instead of the purchase price of the car. In this case, if you lease the new vehicle, you won't get any sales tax credit on the value of your trade-in. Have the salesperson explain the differences in the total amount of sales tax you'll pay comparing a purchase with the lease.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.