“America is a land of taxation that was founded to avoid taxation.”
We weren’t in the market for a car when my wife’s step-grandmother recently decided that she no longer wanted to drive her car. She told the family about it and the price that she wanted for it. None of her other kids or grandchildren were interested, because they all had a newer model than her car, and soon enough, all eyes drifted over to my beater. I have to admit, I realized that the car was being offered at a significant discount, but I couldn’t get out of my mind the notion that we were simply interested in the car because it was being offered at a discount.
But, sometimes, economic considerations take a back seat to family considerations, and while my wife’s stepfather (and for that matter, her step-grandmother) were quite happy to just give us the car, her stepfather, as the conservator for the step-grandmother, didn’t think it was the right thing to do to give us the car. This was a conclusion with which we agreed; we had the money, and we certainly didn’t want the rest of the family to feel like there was a dose of favoritism being dished out in our direction.
We agreed to a price, and then someone in the family piped up that gifts of cars didn’t require a transfer tax.
Since I’ve only ever done one private party car purchase in my life, which was in Germany, I’d always named an end price, paid the money, and received the car. Thus, the concept of a transfer tax was something that never crossed my mind in regards to the purchase of the car. Sure, you hear the car dealer advertisements spurt out “tax, tag, transfer, title, dealership owner’s yacht in the French Riviera fee” in a blur of words right at the end of the advertisement, but it never really sinks in.
The idea, as the family member posited, was that we’d receive the car as a gift from the step-grandmother, and then we’d gift the step-father money over time. Both values were under the annual gift tax exclusion limit of $14,000 for 2013, so from that standpoint, we’d have been fine.
But, then we decided to read the small print on the actual affidavit that the state of Texas requires when you receive a car as a gift.
The icing on the cake was:
For those of you playing along who might wonder what a felony of the third degree in the state of Texas yields you, here’s what Section 12.34 of the Texas Penal Code has to say:
- Imprisonment in the institutional division for not more than 10 years or less than two years.
- In addition to imprisonment, may receive a fine not to exceed $10,000
2 to 10 years in the hoosegow just to avoid paying a few hundred dollars in tax. Not to mention that it was ethically not the right thing to do, since we’d never just outright gift the in-laws that amount unless they needed it, which they don’t. So, we would be giving consideration for the vehicle, and stating that we didn’t give consideration for the vehicle would a) be a lie, and b) potentially subject us to time in the pokey and a stiff swipe to the pocketbook.
Thus, we were going to pay a transfer tax when we bought the car.
After figuring out that we were going to be out of pocket 5.2% more than we originally thought – the transfer tax is 6.5% of 80% of the higher of the assessed value or the purchase price – we had to rethink whether or not we really wanted the car. At this point, I punted and said I’d support whatever my wife wanted to do. Marital happiness is not built on the back of scraping together dollars and cents once you’ve reached the point where it’s no longer necessary.
Exasperated at this extra discovery, my wife blurted out “you should write an article about all of these [CENSORED] taxes that nobody knows about!”
Here it is.
Texas is a fairly popular state with retirees and the like because they don’t have a state income tax. It’s very tempting to mentally reduce the amount of money you’ll need to live on, since, if you live in a state with a state income tax, you’re wiping that tax out, as we did when we moved from Virginia to Texas.
However, there are plenty of other taxes for the state to get its share:
- Sales tax: Texas has a 6.25% sales tax, and local municipalities can tack on up to 2%, making the potential sales tax 8.25%. If you live close to a county border (like we do), it could be worth the drive to go to a county that charges less sales tax, although in our case, the sales tax for both Tarrant county and Johnson county are the same. Boo!
- Property tax: Where we live, the property tax rate is 69.9 cents per $100 of assessed value on a house. In Fort Worth, it’s 85.5 cents per $100 assessed. Thank goodness for country living!
- Ad valorem: In Texas, there’s no ad valorem tax on household goods that don’t generate income, but many states have an ad valorem tax on personal property like cars and boats.
- Franchise tax: If you operate a small business in Texas, you could be subject to a franchise tax of between 0.5% and 1% once your revenues exceed $1,030,000. My last company would have been subjected to this tax, and we probably wouldn’t have known about it until our accountant did our taxes. Since my old company is a Virginia entity, this one doesn’t count, and if I ever make that much as a financial planner, I’ll have already worked too long and should be in retirement.
- Taxes that are included in the price you pay. Many taxes (including sales tax above) are simply factored into the cost of goods and services that you purchase. These include:
- 911 service fees on your cell bill
- Automotive oil
- Sin taxes (cigarettes, alcohol, etc.)
- School taxes (although these are usually rolled into property taxes)
- Hotel taxes
- Gas taxes
- Airport landing taxes
If you’re curious about all of the taxes that Texas charges, you can get a list of them here. Some of my favorites are the mixed beverage tax, the pari-mutuel tax, and the retaliatory tax.
This is more of a cautionary tale than anything. Each state’s taxes will vary, so you’re best off looking on your state’s tax page to see what taxes can be assessed and perhaps spending 15 minutes with your accountant next time you’re filing your annual taxes to make sure that there are no “gotchas” which you may later encounter.
What’s the weirdest tax you’ve ever had to pay? Tell us about your experiences in the comments below!