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Do You Have to Pay a Vehicle Tax? Here's Some Good News

By Matthew Frankel, CFP® - Updated Sep 21, 2018 at 2:57PM

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More than half of the states in the U.S. charge personal property tax on vehicles, but the news isn't all bad.

About half of the states in the U.S. -- 27, to be exact -- charge a personal property tax on vehicle ownership, based on the current value of your vehicle. The average cost is $423 per year. Here's how to determine where your state ranks, and some tidbits of good news for those who have to pay.

Where does your state rank?
New York, New Jersey, Texas, and Florida are a few of the states that don't charge a vehicle property tax at all. On the other end of the spectrum, it can be rather expensive to own a vehicle in many states. The most expensive vehicle taxes are in Rhode Island, where the average driver pays $1,133 per year. Other expensive states include Virginia ($962 on average), Kansas ($905), Mississippi ($743), and Connecticut ($630).

Miniature car next to stack of coins and calculator

Image source: Getty Images.

Some states charge vehicle taxes, but in modest amounts. For example, Montana drivers pay only $85 per year on average for vehicle property taxes. Here's a useful infographic from Wallet Hub that can show you where your state stands, as well as the link to the full list of average taxes.

Source: WalletHub

Good news No. 1: It's tax-deductible
The first bit of good news is that the IRS allows you to deduct personal property taxes that are based on the value of the underlying property, and this includes taxes paid on vehicles.

However, not all vehicle taxes are completely based on the value of the underlying vehicle. Many states also charge a fixed annual registration fee or other charges. It's important that you deduct only the portion of the tax that's based on the vehicle's value (known as the ad valorem tax).

Good news No. 2: It'll go down next year
Since vehicle taxes are based on the resale value of your car, they tend to go down each year as your vehicle depreciates in value. Some cars lose value faster than others, so there's no set guideline to determine how much your tax bill might go down next year, but you should definitely notice a decrease unless your local tax rates have risen.

Many states also offer exemptions or discounts for certain things, such as high-mileage vehicles. These vary widely by state, so consult your local taxing authority to see if you might qualify for any discounts.

Good news No. 3: Your money goes to good causes
Nobody likes paying taxes -- well, at least nobody I've met. However, there is a certain sense of satisfaction when your money funds some worthwhile programs and services.

The breakdown of how your vehicle tax is spent depends on where you live. Most places will send you an itemized tax bill every year that includes such public programs as police, fire departments, libraries, recreational programs and facilities, community colleges, public schools, and more.

To give you an idea of where your taxes might be going, here is an actual itemized vehicle tax bill.

Consider the big picture
Many of the states that charge vehicle taxes assess lower tax rates for other things, and vice versa.

For example, at $416 per year, South Carolina has the ninth-highest vehicle tax rate in the country. However, residents of the state pay the fifth-lowest property tax bills on their homes.

On the other hand, New Jersey has the highest real estate taxes in the U.S., but it doesn't charge its residents a dime for vehicle taxes.

Some states are simply tax-friendly places to live. Delaware has the fourth lowest real estate taxes, no vehicle taxes, and no state sales tax.

The point here is that you shouldn't pay as much attention to individual taxes as you do to the big picture. Just because your state has a high vehicle tax doesn't mean your overall tax burden would necessarily be lower if you moved elsewhere, and maybe your state uses those tax dollars to your benefit in ways other states don't.

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