First time leaser here and I would appreciate someone could answer this rookie question.
When I change the tax rate in the calculator, it seems I am taxed the whole monthly payment. For example, if my monthly is payment is $500 at 0 tax rate, then when I change the tax rate to 10% (make up numbers for simplicity), the monthly payment became roughly $550. This seems to be consistent with the calculator note.
Does that mean I pay tax not only on the depreciation, but also on the rent charge (interest)? That doesn’t make sense to me, as when we finance, we don’t pay tax on interest, only the sales price.
Would paying the tax upfront vs rolling tax into monthly payments make a difference?
I know this differs by state. I am in NJ, but hope to get a general understanding of this.
Sure you do. Your out the door price on a purchase includes sales tax, so youre absolutely paying interest on that if you finance the purchase, unless you pay it upfront.
On a lease, youre only paying rent charge on the amount capitalized. Pay it up front, and the rent charge doesnt apply. Just like financing.
But in finance, that’s the government tax got interested by the bank, not the bank interest got taxed by the government.
It seems the government is getting more tax from a lease vs a sale:
For example, if a car is bought for $50k, and traded for $30k after 3 yrs, the government effectively get the tax against $20k (in most states that trade-ins have tax benefits). What you pay as interest to the bank during this period doesn’t get taxed.
If a car is leased for $50k, and the RV is $30k, then the government get the tax against $20k depreciation plus finance charge generated due to money factor (maybe another $10k).
Leasing works like that, you pay interest on the avg between MSRP and Adjusted Gross Capitalized Cost. (AGCC)
So on the 50k you pay more interest in the beginning and less near the end, on a lease you pay a fixed amount of interest.
So if you roll fees into the lease, you pay interest on the fees because it’s in the AGCC. So yes Leases usually pay more interest year over year and more interest is more payments.
If your state taxes payment, then yes you pay more taxes.
In most states, it is significantly less taxes since youre only paying tax on the lease amount as compared to on the entire purchase price. You typically save thousands on tax.
There are some states where that doesn’t hold true though.
Not quite. You pay interest on the average of the adjusted cap cost and the residual. Look at the money factor payment formula…
Payment = MF x (Adj. Cap + Residual) + (Adj. Cap - Residual) / Term
OR
Payment = (Annual Interest Rate/12) x (Adj. Cap + Residual)/2 + (Adj. Cap - Residual) / Term
Thank you for the response. I think we are talking about different things.
Yes, compared to purchasing, leasing doesn’t pay tax on RV (in most states).
However, it seems leasing pays tax on interest (not the interest of the tax itself, but the interest on the whole capital used).
For purchasing, you don’t pay tax on interest. Then if you trade, you save the tax on “RV” as well.
So for purchase, if you trade in after three years, purchasing pays less tax. If you sell the car yourself after three years, leasing pays less tax. Right?
It depends on the state. But if you are truly worried about tax between purchases and leases, you might be a little micromanaging that detail and missing out on the whole forest of lease charges.
Hmmmm… maybe. It depends upon how the lease contract is written. Most captives and banks will compute the actuarial rate implicit in the leaser (interest rate) to compute interest on the previous lease balance which means interest charges will decline throughout the term of the lease as interest is levied on the declining lease balance. And, accordingly, the depreciation component will increase each month. This is similar to an installment loan. The monthly payment is comprised of two components: lease charge and depreciation charge. And so,
Each month, so much is allocated toward the interest payment (lease charge) and the remaining amount allocated toward the depreciation payment (principal payment).
My issue is not who collects the money, but me paying more out of pocket.
Again, this is not about interest on tax. This is about tax on interest.
In some recent deals I saw the manufacturer give a very great deal (either by incentive or by high RV) but mark up the MF. In such deals your monthly payment can be 25% depreciation, 75% interest.
Then the tax on the whole thing is made more obvious by these deals.
Even if you pay all tax upfront, you would still be taxed on all the interest for the entirety of the lease.
Yes, in NJ, you pay tax on the total of the lease upfront, which means youre paying tax on interest. Doing a larger down payment or a one pay or msds would reduce that. That is a byproduct of being in one of the handful of tax upfront states.
In states that charge tax based on the lease payment it simply does not matter whether the payment is mostly depreciation or interest. The payment is the same and the tax is the same.
In states like MD, I pay tax on the sales price of the vehicle upfront and no tax on each payment.
You will always pay less tax overall in states that tax the payment.
What you’re looking for is an exemption or loophole that simply doesn’t exist. Nj taxes both depreciation and rent. Except for EV which are tax free.
It doesn’t have to make sense. It is what it is.
Basically, in a purchase the interest is not taxed, but in a lease, the interested is taxed. Therefore, the tax benefit is not as high as I thought, especially in this high-MF era.
You simply are not looking at this correctly. You are paying much less tax than if you bought the car outright because you are only paying tax on the total cost of the lease, not the total cost of the car. I don’t understand why this seems to bother you. It sounds like you would rather pay more to buy a car than lease it because you can’t get past paying tax on the interest portion of the lease payment. Would you rather have a 0% money factor and huge depreciation even if the lease payment was exactly the same?
I understand your argument, but it is not true that buying outright pays more tax.
If we compare apple to apples to lease, then the buyer would trade in the car after 3 years and buy another. This way, because the taxable is only the difference (in most states), the buyer is not paying the tax for the trade-in value (equivalent to RV in a lease) either.
Meanwhile, for the interest charged during the 3 yrs, the buyer does not pay tax. But a leaser does.
My point is: if the deal is the same, and the interest and MF are equivalent, buyer pays less tax than leaser if getting a new car every 3 years.
You definitely bring up a great point that we should be aware how sales tax is charged differently on a lease.
However, even if you calculate that the wholesale value will be equivalent to the RV, it still would not be wise to assume that the same dealer you are getting your new car from, would be willing to pay the full wholesale value (oviously in a case that you negotiated a good price on the new car).
