New Jersey lease tax calculation


You paid the tax on the total amount of the trade-in vehicle either upfront or it was financed, so yes, you get the full value. Same with leases, state of NJ wants their tax money at time of purchase/lease execution.

Because you paid tax on that entire vehicle already, regardless of your loan balance. It is simply how it works in NJ.

When you trade in a purchased car, you are essentially paying off that car and selling it to the dealer. The dealer just so happens to be doing the legwork for you. So, if you instead did your own legwork and paid off the loan and then traded it in and took $10k cash (or applied to cap reduction), you’d be entitled to the full tax break, correct? There is no difference in the two scenarios when it comes to taxes.

Yes, you’re absolutely right. I went back and reviewed the leases I negotiated involving trades and what you’ve described is exactly what happened. Don’t know what I was thinking. But, here’s another issue… Suppose only the monthly payments are taxed (like in CA) in a lease instead of the sell price . I haven’t paid tax on the entire vehicle yet, I’m getting a full tax credit on the entire amount of the trade. I can understand why one would get full credit in NY, NJ, Ohio, and NJ. But what about those states that tax the lease payments as they are received?

I have thought about that one myself. I assume you don’t get the tax benefit in those cases, but can’t say for sure.

What’s the specific scenario you guys are thinking? Taxing a lease upfront or monthly results in the same amount and calculation, just impacts how it’s paid. Unless I’m not thinking of something, tax credits could only come into play if you sold the car due to positive equity at the during or at the end of the lease. You have no true ownership during a lease so there would be no credit provided during a transaction as you were taxed for renting the vehicle. If the dealer buys you out at the end of the lease because you have positive equity, there would be no tax credit provided as you never paid tax on the remaining residual. Now technically you already paid taxes on that positive equity via the lease, but highly doubt you get would get credit for that.

Now NJ does allow you to request a refund of sales tax in scenarios where you didn’t receive the full benefit, including if the lease is transferred out of state and I assume if it’s totaled or lease is shorten (i.e. pull head promotion). States like NY do not and just keep your money.

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You would have paid tax on the entire vehicle if the selling price is taxed in states like Illinois and Texas.And, yes, when I use trade equity as a cap reduction it is not taxed… at least not in Ohio.

CA doesn’t give any tax credits (for purchases and leases). If you have a paid-off car worth $50k and want to trade it in for another car, you will pay sales tax on the entire price of the new car.

I’m confused now. Haha

Say I have paid off car and trade it in for 10k, that means the dealer pays me 10k and 0 to the tax. Whereas if I sell it on Craigslist the buyer would pay some amount of tax. Is that right?

And this doesn’t really affect the tax on the new car I’m getting from the dealer. Say if I am now buying a 30k car with cash right away from the dealer, I still pays 30k worth of tax, even if I put the 10k trade into the payment. Is my understanding right?

Depends on the state… OP was about NJ… in CA, apparently they provide no “credit”.

Crazy to think how many times over the same car can be taxed if it’s bought and sold several times.

I only used CA as an example as I know they tax the payment streams. Didn’t mean to suggest or imply that they issue tax credits. Sorry, it was badly worded.

No. You are in NJ, yes? So your trade value is deducted from the sale price BEFORE tax is applied. If a purchase of $30k and trade of $10k, you pay tax on the $20k difference. My rule of thumb in NJ is that it is rarely worth it to sell a car privately for more than $15k thanks to the nearly $1k tax break you’d get trading it in.

Yes, I’m in NJ

Do I have to put down the trade in money towards the new car, or can I take the money in cash?

As mentioned earlier, you can take the cash. It only matters that the dealer is buying the car.

I live in NY, but our tax rules are the same as NJ and I’m struggling to understand how you can calculate the total tax of the lease before you’ve calculated the monthly payments. The monthly payments include the rent charge, and of course the amount you’re “financing” affects this. So if you drive off paying little out of pocket (less than the total tax), it seems like you would get in an infinite loop trying to figure out total tax as you’re trying to change how much you’re financing. Once I have this Total Tax Number and plug it in to my calculator I can get the #s exactly, I’m just confused how to get this ahead of time (the states where tax is calculated at the very end on the actual monthly payments make so much more sense to me)

I’m getting ready to turn in and lease again, so I’m restudying my 2016 lease contract. Here’s the key numbers, based on them can someone help explain how the Total Tax value of $1274.22 was determined mathematically?

MSRP: $45070.00
Sale Price: $40275.95
Incentives/Rebates: $4,250
Residual Rate: 55%
Residual Value: $24788.50
Tax Rate: 7% (my county of NY)
APR: 0.75%
MF: 0.0003125
Lease Term: 36mo

Acquisition Fee: $645
Waste Tire Fee: $12.5
Registration Fee: $10

How does end up with a total tax amount of $1274.22???

(Not sure it matters but my Total Out of Pocket was $500, and my final monthly payment was $385.48)

Thanks in advance,

The incentives/rebates can be taxable so hard to say. Seems about right if total taxable amount was based on approximately 18K. Money down can taxes depending on what it’s applied towards.

You calculate the base payment and then calculate the tax based on that. Add that amount to your net cap cost to get a post-tax monthly payment.

You are correct that it should technically be an infinite loop because you pay tax in the interest and interest on the tax. The way it was explained to me, and usually gets me within less than a buck of the finance manager’s payment is to stop the loop after the first cycle.

So I calculate the rent charge first without the tax, then calculate the tax based on that number, then add that tax back into the equation to recalculate the rent charge, and stop there.

There is no such thing as an infinite loop if the mathematics is done correctly (a little bit of algebra is needed). The base payment (payment excluding non-taxable capped fees) is calculated first as @max_g suggested. If the tax is capped in the lease, the NY payment tax is computed as follows…

term x base payment x t/(1-t) where t = sales tax rate (in NJ, it’s term x base payment x t). Yup, tax is levied on tax in NY state. And so, the methodology for computing sales tax in NY is different than the methodology used in NJ.

Finally, any tax paid upfront must be added to the payment tax computed above to get the total tax. OP did not provide enough information for me to compute the 1274.22 tax. Based on the limited information provided, I get 1243.58. Looks as though there is 440 of taxable fees missing.
OP does show an apr of 0.75% which tells me it’s an interest rate lease. He should not convert the apr to an MF as the resulting mf is not applicable (it’s only an estimate… 0.0003125 is not a valid mf). If OP’s lease is with Ally, they compute lease payments using an interest rate which uses an annuity formula. They also compute the present value of the residual one month nearer to the present in their payment calculation. Not sure why they do this but my best guess is that it’s done partly because they don’t charge a disposition fee last time I checked.

No such thing as an infinite loop if the math is done correctly. NY methodology is different than NJ methodology regarding sales tax calculations. Please post a copy of your lease agreement. Something is missing as your information appears to be incomplete.

It can become a circular reference depending on how you set up an Excel spreadsheet but there are ways around that.

The main thing is you should calculate the base payment (depreciation + rent), not just rent. That will give you the tax due. You can then capitalize that if you want to.

Once, of course.