3 Lessons on Cars and Tax

When we moved to the USA back in 2018, we also shopped actively for cars other than buying our house within a month. Check out my previous post about why we didn’t sell the Portland property after moving to Taipei. 

Coming from Malaysia, we are used to paying a high price for car ownership. Contrarily, the prices of vehicles in America are very affordable. I test-drove all the SUVs and several convertible Ford Mustangs. At first, I was thinking of getting the Jaguar F-Pace SUV which is selling at RM600,000 in Malaysia, but only cost US$50,000 for a brand new one in the USA. But later we chose a Volvo T8 Twin Engine (Hybrid) as a family car for US$52,000 because it has the third row seats, which would be useful when friends visit. It was a used 2016 model, much cheaper than paying for a brand new one with $75,000. A similar Volvo in Malaysia is around RM400,000. 

A month later, in late 2018, we bought a used 2017 Ford Mustang convertible. That is a secondary car that I used mainly to do grocery shopping, send my son to drum lessons and school, and go hiking trails around the beautiful Northwest. I paid US$20,888. A brand new one is around $35,000. In Malaysia, the Ford Mustang is quite popular, although the price is around RM460,000, which is even more expensive than the Volvo. If you are interested in how I got to use the Mustang literally for free, check out this previous article.

I guess you must have realised what I was thinking at that time. That’s a steal! I paid only a fraction for a sports car that would cost the price of a 3-room apartment in Malaysia. So buying the Mustang is a good value buy in the US, but not in Malaysia. On the other hand, buying the Volvo hybrid SUV in Malaysia has the best value for money comparatively.

What caused such a big price difference?

You know the answer — TAX.

If you don’t mind paying a lot of tax money in Malaysia, buy an expensive car. In most cases, 50% of the money you pay for vehicles is tax revenue. 

Since we lived in Oregon, where there is no sales tax, we didn’t pay inflated prices for vehicle ownership. So we were spoiled with choices of paying reasonable prices for luxury cars. 

Anyway, if we conclude that car price is so affordable in the US is quite unfair. Let me elaborate about the mindset as a car owner in the US. Although the car price is low, the auto insurance is not. Moreover, we paid for it with after-taxed money, which has been taxed heavily before it gets to our pockets.

Oregon State imposes a high income tax rate as the top 4 highest taxed states. As Oregonians, we paid close to 9.9% tax for all our incomes. The amount we pay is adequate to buy a new car every year. The State Tax is on top of the federal tax, which is close to 30%. Furthermore, we also pay other taxes like Social Security, Medicare, property tax, county tax, public transport tax, gas tax, etc. 

In the USA, we pay taxes for all our incomes worldwide.

After a few years living in the USA, we found that the system is to tax you on all the income you make, whether from employment, businesses, capital gain, dividends, properties and even bank interests, wherever you earned it. Essentially, you pay taxes when you make money, regardless of whether you spend it or not.

So strategically, if you are not making USD or conducting business in the US market, you won’t enjoy any benefits moving there. That was my situation. Nevertheless, I moved there because my wife was locally hired and was paid in USD. 

How is it compared to Malaysia?

In Malaysia, the tax rate is relatively much lower. In fact, the majority of people don’t contribute any tax money for their incomes. Only 16.5% of Malaysia’s 15 million workforces were subject to individual income tax, according to the Fiscal Outlook 2020 report (FOR2020). 

However, there are other taxes, such as the import tax and SST. There are three different taxes in the case of vehicles: import duty, excise duty, and sales tax. In addition, there is AP (Vehicle Import License) cost involved too. Check out the details on the Malaysian Automotive Association’s website. All these add up and jack up a car’s selling price.

Which situation would you rather have?

Malaysians pay the taxes as we spend money on those things and services. In other words, you have control over how much taxes you wish to pay, depending on how much money you love to spend. In contrast, a US resident pays most of the taxes due before they get to decide what to spend on. 

And here is my question for you to ponder:

“Would you rather pay high taxes and enjoy lower car prices? Or would you rather pay lower taxes but pay high car prices?”

Personally, I would prefer the Malaysians way because I have control over my spending. If I am content with a cheaper car, I pay fewer taxes. 

After experiencing the difference, I figured out some key lessons.

KEY LESSON #1: You have control: less spending = less tax.

During the initial stage of accumulating wealth, it is best to limit your spending. Most of the expensive stuff is priced higher due to taxation. Delay gratification at the early stage can go a long way. Some luxury items are taxed heavily. You get to decide whether it is worth it to pay for the premium, which mostly go to taxes.

KEY LESSON #2: Check the car price without tax and find value for money.

Different motor vehicles have different tax rates. In the Volvo and Mustang case above, you know that you get more discount for buying the Volvo hybrid, which sells double the price higher than the Mustang elsewhere. But in Malaysia, a Mustang costs even more than a Volvo that is bigger with more features.

KEY LESSON #3: Capital gain and dividend have no tax.

When you sell stocks for capital gain, you don’t pay tax on the income in Malaysia. It is also the same for the dividend you receive from stocks. For example, a company founder cum CEO pays a high tax rate for his salary income. But the fat dividend cheque he receives as a major shareholder has no tax. So in Malaysia, the income tax code is favourable to investors and shareholders who own highly profitable businesses.  

In the next article, I will share more about the experience of selling our cars in Malaysia and in the USA. I thought it was easy to sell my Harrier in Malaysia, but it is much simpler in the USA. I loved how easy it was when I sold the Mustang. But then the experience got even better when I sold the Volvo. We did it within 24 hours before we boarded the aircraft to Taipei.

Before you go, tell me which situation you would prefer? The US way or the Malaysian way?