Understanding the Change in Illinois’s Trade-in Sales Tax Credit

Come 2020, buying a car with a trade-in will get a little more expensive for Illinois residents.

Traditionally, a sales tax credit is applied to the purchase of a new vehicle when using an old one to help pay for it, reducing how much sales tax a buyer needs to pay for the whole transaction.

The logic of the system is that buyers have already paid tax on the value of their car once, and shouldn’t need to pay taxes on it again when trading it in. Essentially, the buyer receives a sales tax credit equal to the value of their trade-in, which can easily save buyers thousands of dollars in taxes on the purchase of a new vehicle.

Example—Present Sales Tax Credit

A buyer is trading in a $30,000 car for a 2018 Tesla Model 3 Long Range Dual Motor priced at $45,000. Instead of paying sales tax on the full $45,000 value of the new Model 3, the taxable amount is reduced by the value of the trade-in: $30,000. The buyer will only be taxed on a total of $15,000, instead of $45,000.

With a 7 percent sales tax, what would have been a $3,150 sales tax bill is instead only $1,050. That’s more than $2,000 in savings, just for trading a vehicle in.

The Change—Starting January 1st, 2020

On January 1^st, 2020, a change in Illinois tax law will go into effect, drastically reducing the amount that can be saved on sales tax when trading a vehicle in.

Instead of the taxable amount being reduced by the full value of a trade-in, there’s a $10,000 cap. If a trade-in is worth $10,000 or less, the full value would be received. If a trade-in is worth more than that by any amount, the buyer only receives a $10,000 credit.

With the same cars as the above example—the taxable value of the Model 3 purchase is reduced only by $10,000, even though the trade-in is worth $30,000. Sales tax will be paid based on a total of $35,000

The total sales tax bill will be $2,450 instead of $3,150—leaving the buyer paying $1,350 more in sales tax on the same transaction than if they had purchased the vehicle earlier.

There is still some value to trading in a vehicle after the new rule goes into effect, and buyers with older/less-valuable trade-ins won’t be negatively affected at all.

Illinoisans with more expensive vehicles who are looking to upgrade soon could stand to save thousands by making their new vehicle purchase before the end of the year.

Generally, buyers pay tax based on the location they’re registering their car, not based on the state they’re buying it from. So, while this change to the trade-in sales tax credit affects all buyers who are registering their vehicles in Illinois, there can also be some effects for residents of other states. Be sure to review details of your specific scenario to learn how you will be taxed.