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Using Tax Refunds to Buy a Used Car

Posted by Shabana Motors - 19 March, 2020


With the tax season just around the corner, Americans are expecting to receive their IRS rebate with an average value of $2,700 to $3,000. If you are thinking about buying a used car this tax season, you may have several questions about using your tax refund to do so.

Here, we will go through the frequently asked questions Shabana Motors gets from buyers around this time of year about the option of buying a used car with a tax refund .

1. Why do we have to pay sales tax on a used car?

There are many reasons why you have to pay sales tax on a used car. Used vehicles consume more gas than new ones and also require regular and frequent maintenance as they are not very safe compared to new cars. These factors negatively impact the economy of the country. The sales tax on used cars balances the disturbance in the economy caused by the increased sale of used vehicles.


2. If you get an auto loan through a dealership, do they report it to the IRS?

This is a very important issue since some car buyers believe it might alert the IRS and get them into trouble. The dealership is under no obligation to notify the IRS about a car buyer taking a loan. So, the simple answer to this question is: NO!


3. Is there any federal tax credit for buying a used electric vehicle (EV)?

Good News! You may indeed get a federal tax credit if you buy a used electric vehicle. The federal tax credit is generally $7,500; and it is designed for individuals who have an annual tax bill that is equal to, or higher than this amount. Moreover, due to an increase in sales of electric cars, the government is cutting down on these credits. In case a buyer gets their car leased, the federal tax credit will go directly to the manufacturer offering the lease.


4. Do you pay taxes for used cars in Texas?

In the state of Texas, every used car buyer has to pay a motor vehicle sales tax equal to 6.25% of the purchase price --what is known as “standard presumptive value¨ (SPV)--whichever is the highest. The SPV is applied whether you purchase a car in, or out of state. Only a licensed vehicle dealer is exempted from paying this tax.


5. Does a car loan reduce my income tax?

It depends on whether you are asking for a loan to buy a used car for personal, or commercial reasons. If you are considering taking a car loan to purchase a used vehicle for commercial use, your tax burden may well be reduced. However, if you are taking a car loan to purchase a vehicle for personal use, it will not affect your income tax.


6. How to get income tax relief when buying a new car?

There is no income tax relief on the purchase of a new car.


7. Can I get a refund for my car's extended warranty?

Yes, you can get a refund for your car’s extended warranty. You can cancel an extended warranty whenever you like. After cancellation, you will get a refund for the portion of your policy that you did not use. The amount refunded is deducted from the loan, and you can pay it off in a short time. However, it will not lower the amount of monthly payments.


8. When is the best time of the year to sell/buy a used car?

March to September are the months when the sale of new cars is at its peak. The dealerships are full of used vehicles, which means that a car buyer has plenty of options and an upper hand in negotiations.

Tax rebate can considerably help lowering the financial stress in your life. If you decide to use this as an opportunity to purchase a new or used car, try not to spend the entire amount on it. You can use a portion of the rebate to make a down payment, or choose an inexpensive vehicle. You need to play smart with this extra money and make a decision that suits your lifestyle.

Used car dealerships like Shabana Motors located at 9811 SW Freeway in Houston, offers in-house financing and will also buy your car and will warranty your car for 2 years/24K miles, when passing Shabana Motors 5-star inspection process.

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