Important Tax Changes for Illinois Car Buyers

If you are someone who has been thinking about buying a new car in the near future, then you may want to consider doing so before the new year.

On June 28th Gov J.B Pritzker signed Bill 690 which quietly passed new tax laws that will affect Illinois car buyers. Beginning January 1st, 2020 the value of any trade in vehicle will be capped at $10k in calculating the tax on the transaction.

If you have traded in a car for a new car at any point in the last few years, you likely are somewhat familiar with how the taxation works. Currently, the state collects no sales tax on the trade in value of a car that you are trading in. Up to this point car buyers will only pay sales tax on the difference between the value of their new car and your trade in. The value of your trade in is frequently referred to as your “sales tax credit” when purchasing a new car.

For example, if you are purchasing a new car for $80,000 and your trade in is currently worth $50,000, you are only paying sales tax on $30,000 ($80k - $50k.) With the new Tax changes, your trade in tax credit is now going to be “capped” at $10,000. Meaning that in the previous example, your $50,000 trade in that was previously exempt from sales tax now only give you $10,000 of tax credit.

Given the table above, if you were to purchase a new car today for $80,000 and trade in a car worth $50,000, you would be paying a total sales tax of $2,622. If one were to do that same exact trade in / purchase transaction in 2020, their resulting sales tax would be $6,118, $4,370 higher. With the $50,000 trade in, they no longer receive $50,000 worth of tax credit because it is capped at $10,000.

Senate Bill 690 is estimated to cost Illinois residents $60,000,000 per year. One might think that the revenue generated by an automotive tax would go to something automotive related, mainly roads. However the revenue from this new tax has already been earmarked for vertical infrastructure, mainly new state buildings and renovations.

As with any new tax, Bill 690 has not come without some controversy. Many in the automotive industry have categorized it as double taxation. Pete Sander, President of the Illinois Automobile Dealers Association said "you already paid sales tax when you bought the vehicle first time around.” In reference to the fact that under the new law you will, in theory, be paying tax on a portion of the trade in vehicle that you have already paid original sales tax on.

This update to the tax adds to the list of unfortunate circumstances related to the automotive community in Illinois. In July, Illinois doubled the gasoline tax to 38 cents per gallon. Additionally, Illinois pay the nation’s highest base fee, and the 5th highest overall vehicle registration fee. The revenue’s from those initiatives are also earmarked for, you guessed it, JB Pritzker’s $45 Billion Infrastructure plan.

If you are an Illinois resident and have been considering trading in your car for something new, it really may be prudent to do so before January 1st. This new change will affect everybody trading in a car worth more than $10,000. If you are a current client of Clearwater Capital and are curious to how purchasing a new car would affect your financial plan, please do not hesitate to reach out.

Source: illinoispolicy.org