The Tax Benefits of Leasing Vs. Owning a Vehicle

Tax rates differ by state and areas within the state, but you can likely save on taxes if you lease a vehicle. Depending on your area's tax rate, however, this savings may not prove substantial. Before pursuing a purchase or lease, consider new car tax variables, which can help save you money in the long term.

Lease Taxes

Most states require buyers to pay taxes on a vehicle's lease payment, not the selling price of the car. However, a lease payment also includes an interest rate, so expect to pay taxes on the interest charge, as well. You can keep your taxes out of the lease payment by paying it upfront. Despite paying taxes on the lease payment and interest charge, expect to pay less toward taxes over the lease term than you would with a comparable finance.

Purchase Taxes

If you finance your vehicle or purchase it with cash, you must pay tax on the purchase price of the vehicle. Very few states offer a tax-free vehicle purchase. If your tax rate is over 8 percent, expect to pay thousands of dollars toward tax. Dealers are authorized to collect tax on the state's behalf, but if you purchase a vehicle privately, tax is often due once you transfer ownership. Call your state's motor vehicle office to determine your tax rate and budget for it accordingly.

Lease Purchase

At the end of your lease you can purchase the vehicle for its predetermined market value, which was figured during lease inception. The lease purchase price does not include taxes. In the event that you purchase a lease, it is likely that you'll pay more toward tax than you would have if financing. Shoppers often focus on monthly payment when shopping for a lease and do not negotiate the vehicle's price. As a result, you may spend thousands more for your vehicle. Expect to pay taxes on your purchase price.

Considerations

If you have a vehicle to trade in, it can help you save on tax expenses. Most states recognize that you've already paid taxes on the vehicle you intend to trade. For this reason, many states allow you to deduct the trade value from the new vehicle's purchase price before applying tax. If you have a trade worth $10,000, you would save $800 in tax charges if your area charges an 8 percent sales tax. It is not advisable to trade a vehicle for a lease. If you total the leased vehicle, expect to lose any money you used as a down payment. Insurance payoffs go to the leasing bank, not the lessee.